Li Auto's Q2 2024 Earnings Call Highlights Strong Growth and Market Share Expansion

Earnings call: Li Auto's Q2 shows strong sales and market share growth By Investing.com

Li Auto Inc . (ticker: NASDAQ:LI), a prominent player in the electric vehicle industry, has reported a robust performance for the second quarter of 2024, with vehicle deliveries surpassing expectations and a significant increase in market share. The company delivered over 108,000 vehicles, marking a 25.5% year-over-year growth. Financially, Li Auto achieved total revenues of RMB31.7 billion, a 10.6% increase from the previous year, and a solid gross margin of 19.5%. The company's net income, however, saw a decline of 52.3% year-over-year but increased by 86.2% from the previous quarter. Looking ahead, Li Auto is confident in its ability to deliver over 500,000 vehicles by the end of the year and expects a continued positive free cash flow from the third quarter onwards. Li Auto's second-quarter earnings call painted a picture of a company that is not only navigating the competitive electric vehicle market successfully but also making strategic moves to ensure its continued growth and dominance, particularly in the higher-end NEV market. With a clear focus on technological innovation, market expansion, and financial discipline, Li Auto is positioning itself for a strong performance in the remainder of the year and beyond. Li Auto Inc. (ticker: LI) has demonstrated resilience in the electric vehicle market, and recent data from InvestingPro provides a deeper look into the company's financial health and stock performance. As of Q1 2024, Li Auto boasts a market capitalization of $22.51 billion, reflecting its significant presence in the industry. The company's P/E ratio stands at 14.11, which may appeal to investors looking for reasonably valued stocks within the automobile sector. InvestingPro Tips highlight that Li Auto holds more cash than debt on its balance sheet, which is a reassuring sign of financial stability. This cash reserve could be a critical factor in supporting the company's ambitious plans for R&D and market expansion. Additionally, two analysts have revised their earnings upwards for the upcoming period, indicating a positive sentiment around Li Auto's future performance. In terms of stock movement, Li Auto's price has experienced a notable decline over the past six months, currently trading near its 52-week low. This could present a potential entry point for investors, as the company is still predicted to be profitable this year, according to analysts. For those interested in exploring more about Li Auto, InvestingPro offers additional insights and tips. There are currently 13 additional InvestingPro Tips available for Li Auto at https://www.investing.com/pro/LI, which can provide investors with a more comprehensive understanding of the company's prospects and investment potential. Operator: Hello, ladies and gentlemen. Thank you for standing by for Li Auto's Second Quarter 2024 Earnings Conference Call. At this time, all participants are in listen-only mode. Today's conference call is being recorded. I will now turn the call over to your host, Ms. Janet Chang, Investor Relations Director of Li Auto. Please go ahead, Janet. Janet Chang: Thank you, Kerry. Good evening and good morning, everyone. Welcome to Li Auto's second quarter 2024 earnings conference call. The company's financial and operating results were published in our 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, begin with prepared remarks. Our President, Mr. Donghui Ma; and Senior Vice President, 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 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 risks and uncertainties is included in certain company filings with the US Securities and Exchange Commission and the Stock Exchange of Hong Kong Limited. 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 discussions of unaudited US GAAP financial information as well as unaudited non-GAAP financial measures. Please refer to Li Auto's disclosure documents on the IR section of our website, which contain a reconciliation of the unaudited non-GAAP measures to comparable US GAAP measures. Our CEO will start his remarks in Chinese. There will be English translation after he finishes 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] The NEV penetration rate in China in July was approaching 50%, indicating higher adoption of smart electric vehicles versus ICE (NYSE:ICE) vehicles. As consumer increasingly favor leading brands with strong sales and substantial user bases, we expect the NEV market to further concentrate around top brands. In a complex and rapidly changing environment, in the second quarter, we achieved strong sales performance by focusing on user value and operating efficiency. We delivered more than 108,000 vehicles in the second quarter, representing an increase of 25.5% year-over-year. In the RMB200,000 and higher NEV market, our market share grew from 13.6% in Q1 to 14.4% in Q2, ranking first among domestic auto brands. Since June, we have remained the top-selling brand in RMB200,000 and higher SUV market in China across NEV and ICE vehicles. In terms of performance by model, all Li Auto models remained leaders in their respective market segments. In Q2, Li L7 and Li L8 claimed the top two spots in sales in the RMB300,000 and over large SUV NEV market, while Li L9 continued to be of top sales full-size SUV among users. Additionally, production and delivery for Li L6 continued to ramp up since its launch in April. Driven by its compelling product features and precise market positioning, Li L6 monthly sales deliveries -- monthly deliveries have consistently exceeded 20,000 units since June. Li L6 ranked second in sales in the RMB200,000 and higher passenger vehicle market, including both NEVs and ICE vehicles, only short of Tesla (NASDAQ:TSLA) Model Y. Recently, we reached multiple delivery milestones. On June 21st, our cumulative deliveries exceeded 800,000 vehicles, making us the first emerging new energy auto brand in China to reach this milestone ever. In July, we set a new monthly delivery record of 51,000 units per month. On August 21st, our cumulative deliveries surpassed 900,000 units, an unprecedented achievement for Chinese premium auto brands. I would like to take this opportunity to express my gratefulness to each member of Li Auto and for their hard work, and also my gratefulness to all of our users for their recognition and support. In the second quarter of 2024, we recorded total revenues of RMB31.7 billion, up 10.6% year-over-year, while maintaining a healthy gross margin of 19.5%. We're confident that our operating performance will improve further in the second half of this year as Li L6 completes its production ramp-up and cost-reduction and efficiency improvement efforts come to fruition. Vehicle delivery is the only the beginning of a typical user journey. Through frequent OTAs, we continually add new features and optimize our user experience, allowing Li Auto vehicles to grow with our users. In July, we released OTA 6.0 and OTA 6.1 to all MEGA and L series users, introducing major improvements across autonomous driving, smart space, and smart electric drive features. I would like to highlight the substantial progress we made in autonomous driving. In July, we rolled out our HD mapless NOA to over 240,000 Li AD Max users. This version is no longer dependent on prior information and therefore can operate on almost all roads across all cities in China. Our HD mapless NOA is very well-received, which is also reflected in our accelerating order intake. Since this feature was introduced to beta users in May, the production -- proportion of NOA test drives has nearly doubled. Following the rollout of OTA 6.0, the daily user engagement rate of city NOA has nearly grown -- has increased nearly eight-fold and the average NOA mileage per user have almost tripled. As of now, over 99% of users use our autonomous driving features regularly with cumulative NOA mileage surpassing 1.11 billion kilometers. Additionally, user satisfaction and AD Max take rate are both increasing steadily. Our autonomous driving system continued to iterate quickly. On our autonomous driving summer launch event on July 5, we introduced the industry's first dual-system automatic -- autonomous driving solution, integrating an end-to-end model for E2E with a vision language model or VLM. We rolled out the new solution to approximately 1,000 data users by the end of July. The E2E and VLM models brought much stronger complex resolution and reasoning capabilities to our autonomous driving system. The ONE model approach also facilitates rapid iteration. Our early bird beta testing version iterates three to four times weekly with an average daily user engagement rate of over 70%. Additionally, we developed in-house reconstructed and generative world models for training and validation purposes. This new dual system architecture has many benefits, including more efficient inference, faster model iterations, and more human-like route planning, and better overall user experience. To cope with our growing product portfolio and greater number of vehicles owned, we continue to upgrade and expand our sales and servicing network. In Q2, we upgraded existing shopping mall stores and replaced some lower-performing ones with new sales centers located in major auto parks. The proportion of sales centers has increased to 31% with the total number of showroom display spots increasing by over 13% over the last quarter. As of July 31, 2024, we had 487 retail stores located across 146 cities, as well as 411 service centers and Li-authorized body and paint shops operating in 220 cities in China. Looking at our charging networks, as of August 27, we had 733 charging -- supercharging stations in operation with 3,428 charging stalls. Alongside the ongoing build-out of our own supercharging stations, we collaborated with a number of premium partners to launch the first batch of what we call LI SELECTION supercharging stations in July. We will continue to expand the coverage and increase the density of our supercharging network. This improves the charging experience for our users, allowing more families to choose Li Auto products with no concerns. Looking ahead to the third quarter of 2024, we expect vehicle deliveries to be between 145,000 to 155,000 units. As a growth-driven company, we're committed to creating products and services that exceed our users' expectations while strengthening our brand in the new energy and premium car market. In the first half of 2025, we expect to launch our battery-electric SUVs to serve a broader range of family users. With that, I will now turn it over to our CFO, Johnny, to walk you through our financial performance. Johnny Tie Li: Thank you, Li Xiang. Hello, everyone. I will now walk you through some of our 2024 second 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 second quarter were RMB31.7 billion or $4.4 billion, up 10.6% year-over-year and 23.6% quarter-over-quarter. This included RMB30.3 billion or $4.2 billion from vehicle sales, up 8.4% year-over-year and 25% 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, mainly due to different product mix and pricing strategy changes. The sequential increase was mainly due to the increase in vehicle delivery, partially offset by the lower average selling price as a result of different product mix. Cost of sales in the second quarter was RMB25.5 billion or $3.5 billion, up 13.8% year-over-year and 25.3% quarter-over-quarter. Gross profit in the second quarter was RMB6.2 billion or $850 million, down 0.9% year-over-year and up 16.9% quarter-over-quarter. Vehicle margin in the second quarter was 18.7% versus 21% in the same period last year, and 19.3% in the prior quarter. The year-over-year decrease was mainly due to different product mix and pricing strategy changes, partially offset by cost reduction. The sequential decrease was mainly due to different product mix. Gross margin in the second quarter was 19.5% versus 21.8% in the same period last year and 20.6% in the prior quarter. Operating expenses in the second quarter were RMB5.7 billion or $785.6 million, up 23.9% year-over-year and down 2.7% quarter-over-quarter. R&D expenses in the second quarter were RMB3 billion or $416.6 million, up 24.8% year-over-year and down 0.7% quarter-over-quarter. The year-over-year increase was primarily due to increased expenses to support the expanding product portfolios and technologies as well as increased employee compensation as a result of the growth in the number of staff on a year-over-year basis. The sequential decrease was primarily due to decreased employee compensation, offset by increased expenses to support expanding product portfolios and technologies. SG&A expenses in the second quarter were RMB2.8 billion or $387.4 million, up 21.9% year-over-year and down 5.5% quarter-over-quarter. The year-over-year increase was primarily due to increased employee compensation as a result of the growth in the number of staff as well as increased rental and other expenses associated with the expansion of sales and servicing network. The sequential decrease was mainly due to decreased marketing and promotion activities and employee compensation on a quarter-over-quarter basis. And income from operations in the second quarter was RMB468 million or $64.4 million versus income from operations of RMB1.6 billion in the same period last year, a loss from operations of RMB584.9 million in the prior quarter. Operating margin in the second quarter was 1.5% versus 5.7% in the same period last year, and negative 2.3% in the prior quarter. Net income in the second quarter was RMB1.1 billion or $151.5 million, down 52.3% year-over-year and up 86.2% quarter-over-quarter. Diluted net earnings per share per ADS attributable to ordinary shareholders was RMB1.05 or $0.14 in the second quarter versus RMB2.18 in the same period last year and RMB0.56 in the prior quarter. And turning to our balance sheet and cash flow. Our cash position remained strong and stood at RMB80 -- RMB97.3 billion or $13.4 billion as of June 30, 2024. Net cash used in operating activities in the second quarter was RMB429.4 million or $59.1 million versus net cash provided by operating activities of RMB11.1 billion in the same period last year and net cash used in operating activities of RMB3.3 billion in the prior quarter. Free cash flow was negative RMB1.9 billion or negative $254.9 million in the second quarter versus positive RMB9.6 billion in the same period last year and negative RMB5.1 billion in the prior quarter. And now for our business outlook, for the third quarter of 2024, the company expects the deliveries to be between 145,000 and 155,000 vehicles, representing a year-over-year increase of 38% to 47.5%. The company also expects third-quarter total revenues to be between RMB39.4 billion and RMB42.2 billion or $5.4 billion and $5.8 billion, representing a year-over-year increase of 13.7 billion to 21.6%. This business outlook reflects the company's current and preliminary view on its business situation and market conditions, 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. Operator: [Operator Instructions] Your first question comes from Tim Hsiao with Morgan Stanley (NYSE:MS). Tim Hsiao: [Foreign Language] So my first question is about the autonomous driving. I think the Li Auto is diving into the NTM autonomous technology and expanding the team aggressively, how would Li Auto evaluate the return and efficiency of such ambitious investment? What could be the more relevant metrics for investors to assess the result and commercialization progress of the auto NTM autonomous driving technology? That's my first question. Thank you. Xiang Li: [Foreign Language] Since the beginning, our investment yield on autonomous driving has always been pretty high. And in terms of operating metrics, we'd like to focus on two key results. One is whether our user is willing to use it and second is whether the user is willing to pay for it. So on the user front, metrics include the percentage time used or percentage mileage used. And since we launched HD mapless NOA in July, users' usage rate has been increasing steadily as shown by both the daily active rate and the mileage driven have both increased manyfold. On the market front, the improvement in NOA has positive effects on adoption rate. Since for potential users who come to our stores, the percentage of users who take NOA on test drives has increased more than twice. And the percentage of NOA AD Max take rate on every model has also been increasing, especially cars priced above RMB300,000, the percentage of AD Max take rate has already approached 70%. And we believe that VLM and E2E model marks the beginning of establishing entry barriers in terms of R&D for autonomous driving because we believe that this generation is real AI-powered autonomous driving. And AI further relies on large amounts of data and computing power. So, only companies with the ability to invest in this data and training capability and also have a large enough user or vehicle base are able to become bigger and bigger in autonomous driving. And this improvement in autonomous driving will then further increase sales overall and also the number of AD Max equipped vehicles. And this further in return allows us to invest even more in autonomous driving. So this is a very positive snowball effect. Tim Hsiao: [Foreign Language] My second question is about the competition. Could the management comment on the ongoing competition between and Li Auto and Huawei? How do we expect the competitive landscape to evolve into second-half as both brands like Li Auto and AITO keep striving for the top spot in family SUV market with advanced smart driving features? That's my second question. Thank you. Xiang Li: [Foreign Language] So first of all, HIMA is our biggest competitor in the market and our view is that we will continue to coexist with HIMA in the long-term in a very healthy fashion. And our attitude has always been to continually learn from Huawei, especially its R&D system and methodologies in operations and management as for us as a startup company to have such a model to learn from is very critical. Ben Wang: [Foreign Language] I've got two questions. Number one is about the margin guidance for this year. Did you maintain a full-year 20% gross margin guidance? Especially for the third quarter, basically, you mentioned that the AD Max version proportion increased to more than 70%. Is that going to be increasing the product mix, I mean the third-quarter gross margin -- vehicle gross margin back to 20%? That's the first question. The second question is about your pure EV products. This is where you have been postponed vehicle by almost half a year. Did you change the design, especially the exterior design because for some of the style feature, it showed like design did not yet. Most of the customers prefer to change the standard design to differentiate from the MEGA design. Can you provide any comment on that? Thank you. Johnny Tie Li: Hello, Ben, and this is Johnny. I will take the first question. I think last quarter we guided vehicle margin of around 18%. Actually, finally, we deliver 18.7% and this is effort of the company and also the product mix and the delivery -- the final delivery. So for the third quarter, we believe our vehicle marketing will come back a little bit around -- it will be over 19% and the total gross margin will be above 20% in the third quarter. Thank you. Xiang Li: [Foreign Language] Li MEGA has been a great validation of our capabilities in 800 volt high-voltage drivetrain and also our R&D capabilities in this area, including the drivetrain efficiency of our high-voltage platform and also the end-to-end charging experience and capabilities. And as we make improvements in autonomous driving, we have also become a Tier 1 player in autonomous driving. And similarly, our competitiveness in smart cockpit or smart space has also been very strong historically. So for our best SUVs, we really only need to solve two important problems. The first one is overall styling of the product. And the second one is to make sure that we have well over 200,000 charging stations by the time we start deliveries of our product. So overall, we are pretty confident in the competitiveness of our best electric SUVs, and we -- our plan or our goal is to become a Tier 1 player in the premium BEV market in two years' time. Ben Wang: [Foreign Language] Operator: Your next question comes from Tina Hou with Goldman Sachs (NYSE:GS). Tina Hou: [Foreign Language] So, thanks management for taking my question. First question is regarding our competition strategy into the second half of the year. So especially given that we don't have any new model launches for the second half, how are we expecting to maintain or even improve our sales volume? The second question is, since earlier this year, management has lowered overall volume guidance to a low end of 560,000 units for the full year 2024. However, we also gave a quite high CapEx guidance at around RMB15 billion, I think, in first quarter. So given the lowered volume guidance, how should we think about the pace of capacity expansion as well as new CapEx guidance? Thank you. James Liangjun Zou: Hi, Tina. This is James. I will take your first question. New models are only one of the reasons contributing to sales growth. And from my point of view, efficient sales operations is another way to promote sales and that's what we are doing now. And looking forward, we will continue to optimize the deployment of our stores while strengthening our capability to gain online need. This will open the door to higher possibilities of sales growth while enhancing the efficiency of sales operations. In addition, our recently increased publicity of autonomous driving also facilitated sales growth, in particular, the sales of AD Max models. As the results show, our market share in the RMB200,000 and higher NEV market increased to 14.4% in second quarter 2024 from 13.6% in the first quarter. We aim to grow our market share in this segment further to 16% in the last quarter this year. Johnny Tie Li: I think -- Tina, this is Johnny. And I think with James has just mentioned, 16% market share on the NEV market above RMB200,000. And if we assume a healthy passenger vehicle market in the second half of this year, we are very confident our full-year delivery will finally over 0.5 million delivery vehicles. And for the CapEx, we have optimized our CapEx pace. And in the beginning of this year, we estimate the CapEx is about $2 billion. And currently, we estimate the CapEx will be $1.1 billion to $1.2 billion. And for the free cash flow and for June and July, the free cash flow has been positive. And with going -- with the optimization of the CapEx investment and also the improvement of the operational efficiency, we are very confident that our free cash flow will come back to positive starting from the third quarter. Operator: Your next question comes from Xu Yingbo with CITIC Securities. Xu Yingbo: [Foreign Language] And so I have two questions. The first question is about end-to-end autonomous driving. So what's our view about our future plan all in this area? And the second question is about robotaxi, how we see this trend? Thank you. Xiang Li: [Foreign Language] First of all on the end-to-end VLM model, the iteration rate and performance actually exceeded our operations. Since we began our 1,000 early bird testing program in July, in less than a month, the model has gone through nine iterations, on average a new iteration every 34 days. The amount of data used for training has also increased from 1 million clips at the beginning to 2.3 million clips currently, and the model capabilities has also been increasing along the way. Many of our early bird testing users have posted many videos of their end-to-end driving on social media to showcase the great performance on city roads. The rapid iteration of the model can -- won't be possible without high -- highly efficient and automated testing capabilities. And we rely on world models to build a simulation testing system. In this system and using user feedback and using real-world scenario reconstruction and generative technologies, we have built a pull of a library of mistakes and testing scenarios for our models to make sure that our models are most fully tested and trained. This testing program can rate the models in terms of safety, comfort, and many other dimensions. And we believe that there has been a fundamental change in autonomous driving R&D that has increased from feature iteration to model capability iteration. And the speed of iteration is highly dependent on whether we have high-quality and large amounts of -- high-quality data and large amounts of computing power. And also what I mentioned earlier, which is the automated simulation testing program. So our end-to-end VLM system, we we're planning -- for this system, we're planning to launch a greater scale or approximately 10,000 user scale testing program starting in September. And on your question regarding robotaxi, our view interestingly is that as we reach Level 4 autonomous driving, the demand for taxi -- for ride-hailing and taxi and will actually decrease. And obviously, the market will take more time for us to observe and to see how it develops in the future. Operator: Your next question comes from Paul Gong with UBS. Paul Gong: [Foreign Language] So we have seen recent weak consumption sentiment in China, but the auto sales series continue to grow in terms of the sales volume. In the environment of the government stimulus as well as certain pricing adjustments upwards by the German premium brand, have you seen the competitive environment in the high-end market has sequentially improved recently? James Liangjun Zou: Okay, Paul, this is James. I will take your question. And I believe our recent robust sales performance has been largely contributable to our Li series competitive advantage from its product strength. And our adaptability and ability to make swift adjustments in responding to the market. Apart from the traditional sales channels in the second quarter, we ramped up our investment in online marketing resources such as Douyin and other online platform, achieving significant results as it brought our process substantial increase in [sales leads] (ph). Additionally, we are revolutionizing our sales system by giving more empowerment to regional level. This system allows each region to adopt regional sales strategy in a flexible approach on the condition of accomplishing profit targets given by the company. This approach significantly enhances the sales potential to reach to -- each regional -- to each region. Last but not least, since June 2024, the NEV penetration rate in the RMB200,000 and higher market has reached over 50%, which is a significant milestone. After this, I think the premium NEV industry will continue to consolidate and I believe the auto will be one of the main beneficiaries during this process. Thank you Paul Gong: [Foreign Language] So my second question is regarding the preparation work for the BEV models next year. Given the half-year adjustment of the launching time, will you adopt more new technologies, the latest technologies, and how much of the scale have you been preparing for the supply chain in terms of the capacity? Xiang Li: [Foreign Language] Our plan is still to launch multiple 800-volt high voltage pure electric vehicles next year, 2025. In terms of R&D, everything is on track. So far, we have completed multiple rounds of low-volume trial production of prototype vehicles. And according to our testing and including, for example, high-temperature, high humidity durability testing schedule, we -- everything is going according to plan. And in terms of supply-chain readiness, everything is also on track. The planned production capacity is sufficient to meet the sales targets. And this -- the factories for manufacturing these vehicles have completed production -- completed construction and the four major lines of stamping, welding, painting, and assembly are also under testing and installation. We are planning to have key components develop in-house on our BEV electric vehicles and these have also been going through performance testing. External suppliers and our partners have also been developing and building out their production capacity on track. Everything is going according to plan. So overall, we're very confident to deliver our BEV models next year according to plan. Operator: Your next question comes from Yuqian Ding with HSBC (LON:HSBA). Yuqian Ding: [Foreign Language] So, I got two questions. The first is, last season management talked about the reallocate the model display in the channel to maximize the product mix and bring more exposure to the high-end model like L8. How does that go versus the expectation? The second question is about, there's been quite some restructuring and adjustment in the first half. Could you refresh the full year R&D expense guidance and highlight us, change if any? Thank you. James Liangjun Zou: Okay, Yuqian. This is James. I will take your first question. As we open more stores in auto parks, the number of display spots for L8 has gradually recovered. We also developed the new online sales channels including Douyin to ensure sufficient sales leads for L8. So now L8 sales has been steadily improving since April. Currently, its monthly deliveries has recovered to the range of 6,000 to 7,000 units. Johnny Tie Li: Hi, this is Johnny. For R&D, we expect the full year GAAP R&D will be below RMB12 billion. Thank you. Operator: Your next question comes from Jin Zhong with CICC. Jin Zhong: [Foreign Language] So my first question is about the distribution network. After the review of the first half of 2024, we have made a lot of improvements. So just as Mr. Li Xiang mentioned about, we increased the proportion of the central stores. So can you share more about the detail behind the above changes about the logic and our [stance] (ph) on the distribution network extension and also entering into the lower tier cities. And also what we should do more to prepare for the launch of EV models next year. James Liangjun Zou: Okay, Jin Zhong, this is James. I will take your question. So first of all, we are speaking to our direct sales model, and we are aiming to display all models in our showrooms. And that's what we are doing now. And our retail stores in all auto parks have larger floor spaces and have the capacity to display 9 to 11 vehicles. And we will display all of our models in these stores. So since the start of this year, we have been making many adjustments towards our sales channels. We are gradually replacing low performing stores in the shopping malls with retail stores in leading auto parks. We will continue to focus on the best auto parks in the top 150 cities and open large high-quality stores there. In terms of our achievements so far, the proportion of our stores in auto parks has increased from 24% last year -- end of last year, to 31% at end of June 2024. We plan to further increase the proportion to close to 50% by end of this year. And regarding your question that next year for the BEV, when we launch our BEV models, so we will continue to increase the proportion of the car park stores next year, so to facilitate our display spots. The showroom capacity per store also improved, alongside the increased proportion of stores in auto parks, the number of showroom vehicles per store has increased from 4.6 units at the end of last year to 5.1 units at the end of June 2024. And we plan to further increase this metric to cover six units per store by end of this year. Our total number of showroom display ports has increased from 2,642 at the end of last year to 2,919 at the end of June 2024. We plan to further increase this number to over 3,600 by end of this year. Thank you. Operator: As we are reaching the end of our conference call now, I'd like to turn the call back over to the company for closing remarks. Ms. Janet Chang, please go ahead. Janet Chang: Thank you once again for joining us today. If you have further questions, please feel free to contact the Li Auto's Investor Relations team through the contact information provided on our IR website. This concludes this conference call. You may now disconnect your line. Thank you.

Li Auto (LI) Q2 2024 Earnings Call Transcript

Hello, ladies and gentlemen, thank you for standing by for Li Auto's second quarter 2024 earnings conference call. [Operator instructions] Today's conference call is being recorded. I will now turn the call over to your host, Ms. Janet Chang, investor relations, director of Li Auto. Thank you, Kelly. Good evening, and good morning, everyone. Welcome to Li Auto second quarter 2024 earnings conference call. The company's financial and operating results were published in a press release earlier today and are 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, begin with prepared remarks. Our president, Mr. Donghui Ma; And senior vice president, 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 involve incurrent risks 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. Securities and Exchange Commission and the stock exchange of Hong Kong Limited. 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 discussions of unaudited U.S. GAAP financial information, as well as unaudited non-GAAP financial measures. Please refer to Li Auto's disclosure documents on the IR section of our website, which contains a reconciliation of the unaudited non-GAAP measures to comparable U.S. GAAP measures. Our CEO will start his remarks in Chinese. There will be English translation after he finishes all his remarks. With that, I will now turn the call over to our CEO, Mr. [Foreign language] The NEV penetration rate in China in July was approaching 50%, indicating higher adoption of smart electric vehicles versus ICE vehicles. As consumers increasingly favor leading brands with strong sales and substantial user bases, we expect the NEV market to further concentrate around top brands. In a complex and rapidly changing environment in the second quarter, we achieved strong sales performance by focusing on user value and operating efficiency. We delivered more than 108,000 vehicles in the second quarter, representing an increase of 25.5% year over year. In the RMB 200,000 and higher NEV market, our market share grew from 13.6% in Q1 to 14.4% in Q2, ranking first among domestic auto brands. Since June, we have remained the top-selling brand in RMB 200,000 and higher SUV market in China across NEV and ICE vehicles. In terms of performance by model, all the Li Auto models remain leaders in their respective market segments. In Q2, Li L7 and Li L8 claimed the top two spots in sales in RMB 300,000 and over large activity NEV market. While Li L9 continue to be a top sales of full-size SUV among users. Additionally, production and delivery for Li L6 continue to ramp up since its launch in April. Driven by its compelling product features and precise market positioning, Li L6 monthly sales deliveries -- monthly deliveries have consistently exceeded 20,000 units since June. Li L6 ranked second in sales in RMB 200,000 and higher passenger vehicle market, including both NEVs and ICE vehicles, only short of Tesla Model Y. Recently, we reached multiple delivery milestones. On June 21, our cumulative deliveries exceeded 800,000 vehicles, making us the first emerging new energy auto brand in China to reach this milestone ever. In July, we set a new monthly delivery record of 51,000 units per month. On August 21, our cumulative deliveries surpassed 900,000 units, an unprecedented achievement for Chinese premium auto brand. I would like to take this opportunity to express my gratefulness to each member of Li Auto and for their hard work and also my gratefulness to all of our users for their recognition and support. In the second quarter of 2024, we recorded total revenues of RMB 31.7 billion, up 10.6% year over year while maintaining a healthy gross margin of 19.5%. We're confident that our operating performance will improve further in the second half of this year as Li L6 completes its production ramp-up and cost reduction and efficiency improvement efforts come to fruition. Vehicle delivery is only the beginning of a typical user journey. Through frequent OTAs, we continually add new features and optimize our user experience, allowing the Li Auto vehicles to grow with our users. In July, we released OTA 6.0 and OTA 6.1 to all MEGA and L series users, introducing major improvements across autonomous driving, smart space, and smart electric drive features. I would like to highlight the substantial progress we made in autonomous driving. In July, we rolled out our HD map-less NOA to over 240,000 Li AD Max users. This version is no longer dependent on prior information and therefore can operate on almost all roads across all cities in China. Our HD map-less NOA is very well received, which is also reflected in our accelerating order intake. Since this feature was introduced to beta users in May, the proportion of NOA test drives has nearly doubled. Following the rollout of OTA 6.0, the daily user engagement rate of city NOA has nearly grown -- has increased nearly eightfold, and the average NOA mileage per user has almost tripled. As of now, over 99% of the users use our autonomous driving features regularly with cumulative NOA mileage surpassing 1.11 billion kilometers. Additionally, user satisfaction and AD Max take rate are both increasing steadily. Our autonomous driving system continued to iterate quickly. On our autonomous driving summer launch event on July 5, we introduced the industry's first dual-system autonomous driving solution, integrating an end-to-end model for E2E with a vision language model or VLM. We rolled out the new solution to approximately 1,000 beta users by the end of July. The E2E and VLM model brought much stronger conflict solution and reasoning capabilities to our autonomous driving system. The one-model approach also facilitates rapid iterations. Our early bird beta testing version iterates three to four times weekly with an average daily user engagement rate of over 70%. Additionally, we developed in-house reconstructed and generated world models for training and validation purposes. This new dual-system architecture has many benefits, including more efficient inference, faster model iterations and more human-like route planning, and better overall user experience. To cope with our growing product portfolio and greater number of vehicles owned, we continue to upgrade and expand our sales and servicing network. In Q2, we upgraded existing shopping mall stores and replaced some lower-performing ones with new sales centers located in major auto parts. The proportion of sales centers has increased to 31% with the total number of showroom display spots increasing by over 13% over the last quarter. As of July 31, 2024, we had 487 retail stores located across 146 cities, as well as 411 service centers and Li-authorized body and paint shops operating in 220 cities in China. Looking at our charging network. As of August 27, we had 733 supercharging stations in operation with 3,428 charging stalls. Alongside the ongoing build-out of our own supercharging stations, we collaborated with a number of premium partners to launch the first batch of what we call Li selection supercharging stations in July. We will continue to expand the coverage and increase the density of our supercharging network. This improves the charging experience for our users, allowing more families to choose Li Auto products with no concerns. Looking ahead to the third quarter of 2024, we expect vehicle deliveries to be between 145,000 to 155,000 units. As a growth-driven company, we're committed to creating products and services that exceed our users' expectations while strengthening our brand in the new energy and premium car market. In the first half of 2025, we expect to launch our battery-electric SUVs to serve a broader range of family users. With that, I will now turn it over to our CFO, Johnny, to walk you through our financial performance. Johnny Tie Li -- Chief Financial Officer Thank you, Li Xiang. Hello, everyone. I will now walk you through some of our 2024 second 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 second quarter were RMB 31.7 billion or $4.4 billion, up 10.6% year over year and 23.6% quarter over quarter. It included RMB 30.3 billion or $4.2 billion from vehicle sales, up 8.4% year over year and 25% quarter over quarter. The year-over-year increase was mainly attributable to the increase in vehicle delivery, partially offset by the lower average selling price, mainly due to different product mix and pricing strategy changes. The sequential increase was mainly due to the increase in vehicle delivery, partially offset by the lower average selling price as a result of different product mix. Cost of sales in the second quarter was RMB 25.5 billion or $3.5 billion, up 13.8% year over year and 25.3% quarter over quarter. Gross profit in the second quarter was RMB 6.2 billion or $850 million, down 0.9% year over year and up 16.9% quarter over quarter. Vehicle margin in the second quarter was 18.7% versus 21% in the same period last year and 19.3% in the prior quarter. The year-over-year decrease was mainly due to different product mix and pricing strategy changes, partially offset by cost reduction. The sequential decrease was mainly due to different product mix. Gross margin in the second quarter was 19.5% versus 21.8% in the same period last year and 20.6% in the prior quarter. Operating expenses in the second quarter were RMB 5.7 billion or $785.6 million, up 23.9% year over year and down 2.7% quarter over quarter. R&D expenses in the second quarter were RMB 3 billion or $416.6 million, up 24.8% year over year and down 0.7% quarter over quarter. The year-over-year increase was primarily due to increased expenses to support the expanding product portfolio and technology, as well as increased employee compensation as a result of the growth in the number of staff on a year-over-year basis. The sequential decrease was primarily due to decreased employee compensation, offset by increased expenses to support expanding product portfolios and technology. SG&A expenses in the second quarter were RMB 2.8 billion or $387.4 million, up 21.9% year over year and down 5.5% quarter-on-quarter. The year-over-year increase was primarily due to increased employee compensation as a result of the growth in the number of staff, as well as increased rental and other expenses associated with the expansion of sales and servicing network. The sequential decrease was mainly due to increased marketing and promotion activity and employee compensation on a quarter-over-quarter basis. And income from operations in the second quarter was RMB 468 million or $64.4 million versus income from operations of RMB 1.6 billion in the same period last year, a loss from operations of RMB 584.9 million in the prior quarter. Operating margin in the second quarter was 1.5% versus 5.7% in the same period last year and negative 2.3% in the prior quarter. Net income in the second quarter was RMB 1.1 billion or $151.5 million, down 52.3% year over year and up 86.2% quarter over quarter. Diluted net earnings per share per ADS attributable to ordinary shareholders was RMB 1.05 or $0.14 in the second quarter versus RMB 2.18 in the same period last year and RMB 0.56 in the prior quarter. And turning to our balance sheet and cash flow. Our cash position remained strong and stood at RMB 97.3 billion or $13.4 billion as of June 30, 2024. Net cash used in operating activities in the second quarter was RMB 429.4 million or $59.1 million versus net cash provided by operating activities of RMB 11.1 billion in the same period last year and net cash used in operating activities of RMB 3.3 billion in the prior quarter. Free cash flow was negative RMB 1.9 billion or negative $254.9 million in the second quarter versus positive RMB 9.6 billion in the same period last year and negative RMB 5.1 billion in the prior quarter. And now for our business outlook. For the third quarter of 2024, the company expects the deliveries to be between 145,000 and 155,000 vehicles, representing a year-over-year increase of 38% to 47.5%. The company also expects third quarter total revenues to be between RMB 39.4 billion and RMB 42.2 billion or $5.4 billion and $5.8 billion, representing a year-over-year increase of 13.7% to 21.6%. 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. Thank you. [Operator instructions] Your first question comes from Tim Hsiao with Morgan Stanley. Tim Hsiao -- Morgan Stanley -- Analyst [Foreign language] So my first question is about the autonomous driving because the [Inaudible] is diving into the NTM autonomous technology and expanding the team aggressively. How to evaluate the return and efficiency of such ambitious investment? What could be the more relevant metrics for investors to assess the result in the commercialization progress of the autonomous driving technology? That's my first question. Unknown speaker -- -- Analyst [Foreign language] Since the beginning, our investment yield on autonomous driving has always been pretty high. And in terms of operating metrics, we'd like to focus on two key results. One is whether our user is willing to use it and second is whether a user is willing to pay for it. So on the user front, metrics include the percentage time used or percentage mileage used. And since we launched HD map-less in July, users usage rate has been increasing steadily, as shown by both the daily active rate and the mileage driven have both increased manyfold. On the market front, the improvement in NOA has positive effects on adoption rate. Since -- for potential users who come to our stores, the percentage of users who take NOA on test drives has increased more than twice, and the percentage of NOA AD Max take rate on every model has also increased, especially cars priced above RMB 300,000. The percentage of AD Max take rate has already approached 70%. And we believe that VLM and E2E model marks the beginning of establishing entry barriers in terms of R&D for autonomous driving because we believe that this generation is real AI-powered autonomous driving. And AI further relies on large amounts of data and computing power. So only companies with the ability to invest in this data and training capability and also have large enough user or vehicle base are able to become bigger and bigger in autonomous driving. And this improvement in autonomous driving will then further increase sales overall and also the number of AD Max-equipped vehicles. And this further, in return, allows us to invest even more in autonomous driving. So this is a very positive snowball effect. Tim Hsiao -- Morgan Stanley -- Analyst [Foreign language] My second question is about the competition. Could management comment on the ongoing competition between Li Auto and Huawei? How do we expect the competitive landscape to evolve into second half as both brands like Li Auto and Huawei keep striving for the top spot in family SUV market with the various smart driving features? That's my second question. Unknown speaker -- -- Analyst [Foreign language] So first of all, Huawei is our biggest competitor in the market, and our view is that we will continue to coexist with Huawei in the long term in a very healthy fashion. And our attitude has always been to continually learn from Huawei, especially its R&D systems and methodologies in operations and management. For us, as a start-up company, to have such a model to learn from is very critical. Operator Your next question comes from Bin Wang with Deutsche Bank. Bin Wang -- Deutsche Bank -- Analyst [Foreign language] I've got two questions. Number one is about the margin guidance for this year. Did you maintain the full-year 20% gross margin guidance? Especially for the third quarter, basically, you mentioned that AD Max version proportionally increased to more than 70%. Is that going to be increasing the product mix, I mean, the third quarter gross margin -- vehicle gross margin back to 20%? That's the first question.The second question is about your pure EV products. This is where you have been postponed vehicle by almost half year. Did you change the design, especially in 3D design, because from my picture, it showed that the design did not change yet? Most of the customers prefer to change standard design to differentiate from the MEGA design. Can you provide any comment on that? Johnny Tie Li -- Chief Financial Officer This is Johnny. I'll take the first question. I think last quarter, we guide vehicle margin around 18%. Actually, currently, we deliver 18.7%, and this is an effort of the company and also the product mix and delivery -- the final delivery. So for the third quarter, we believe our vehicle marketing will come back a little bit around -- it will be over 19%, and the total gross margin will be above 20% in the third quarter. Unknown speaker -- -- Analyst [Foreign language] Li MEGA has been a great validation of our capabilities in 800-volt high-voltage drivetrain and also our R&D capabilities in this area, including the drivetrain efficiency of our high-voltage platform and also the end-to-end charging experience and capabilities. And as we make improvements in autonomous driving, we have also become a tier 1 player in autonomous driving. And similarly, our competitiveness in smart cockpit or smart space has also been very strong historically. So for our best SUVs, we really only need to solve two important problems. The first one is overall styling of the product and the second one is to make sure that we have well over 200,000 charging stations by the time we start deliveries of our product. So overall, we are pretty confident in the competitiveness of our best electric SUVs, and we -- our plan or our goal is to become a tier 1 player in the premium BEV market in two years' time. Operator Your next question comes from Tina Hou with Goldman Sachs. Tina Hou -- Goldman Sachs -- Analyst [Foreign language] First question is regarding our competition strategy into the second half of the year. So especially given that we don't have any new model launches for the second half, how are we expecting to maintain or even improve our sales volume? The second question is since earlier this year, management has lowered overall volume guidance to a low end of 560,000 units for full-year 2024. However, we also gave a quite high capex guidance at around RMB 15 billion, I think, in first quarter. So given the lower volume guidance, how should we think about the pace of capacity expansion as well as new capex guidance? James Liangjun Zou -- Senior Vice President, Sales and Service Tina, this is James. I will take your first question. New models are only one of the reasons contributing to sales growth. And from my point of view, efficient sales operations is another way to promote sales, and that's what we are doing now. Looking forward, we will continue to optimize the deployment of our stores while strengthening our capability to gain online [Inaudible]. This will open the door to higher possibilities of sales growth while enhancing the efficiency of sales operations. In addition, our recent increased publicity of autonomous driving also facilitated sales growth, in particular, the sales of AD Max models. As the results show, our market share in the RMB 200,000, and high EV market increased to 14.4% in second quarter 2024 from 13.6% in the first quarter. We aim to grow our market share in these segments further to 16% in the last quarter this year. Johnny Tie Li -- Chief Financial Officer I think -- Tina, this is Johnny. I think what James Zou mentioned, 16% market share on the EV market, about RMB 200,000. And if we assume a healthy passenger vehicle market in the second half of this year, yes, we are very confident our full-year delivery finally over 0.5 million delivery vehicles. And for the capex, we have optimized our capex phase. And in the beginning of this year, we estimate the capex is about $2 billion. Currently, we estimate the capex will be $1.1 billion to $1.2 billion. And for the free cash flow and for June, July, the free cash flow has been positive. And going with the optimize of the capex investment and also the improvement of the operation and frequency, we are very confident our free cash flow will come back to positive starting from [Inaudible] call. Operator Your next question comes from Xu Yingbo with Citic Securities. Yingbo Xu -- CITIC Securities -- Analyst [Foreign language] I have two questions. The first question is about end-to-end autonomous driving. So what's our view about our future plan or in this area? And the second question is about robotaxi, how we see this trend. Unknown speaker -- -- Analyst [Foreign language] First of all, on end-to-end VLM model, the iteration rate and performance actually exceeded our operations since we began our 1,000 early bird testing program in July. In less than a month, the model has gone through nine iterations; on average, a new iteration every 34 days. The amount of data used for training has also increased from 1 million clips at the beginning to 2.3 million clips currently, and the model capabilities has also been increasing along the way. Many of our early bird testing users have posted many videos of their end-to-end driving on social media to showcase the great performance on city roads. The rapid iteration of the model won't be possible without highly efficient and automated testing capabilities, and we rely on world model to build a simulation testing system. And this system, using user feedback and using real-world scenario of reconstruction and generated technologies, we have built a pool of -- a library of mistakes and testing scenarios for our model to make sure that our models are most fully tested and trained. This testing program can rate the models in terms of safety, comfort, and many other dimensions, and we believe that there has been a fundamental change in autonomous driving R&D. It has increased from future iteration to model capability iteration, and the speed of speed of integration is highly dependent on whether we have high quality and large amounts of high-quality data and large amounts of computing power and also what I mentioned earlier, which is the automated simulation testing program. So our end-to-end VLM system, we're planning -- for this system, we're planning to launch a greater scale or approximately 10,000 user scale testing program, starting in September. And on your question regarding robotaxi, our view, interestingly, is that as we reach level 4 autonomous driving, the demand for taxi ride hailing and taxi will actually decrease. And obviously, the market will take more time for us to observe and to see how it develops in the future. [Foreign language] So we have seen recent weak consumption sentiment in China, but the auto sales continue to grow in terms of the sales volume. In the environment of the government stimulus, as well as certain pricing adjustment upwards by the German premium brand, have you seen the competitive environment in the high-end market has sequentially improved recently? James Liangjun Zou -- Senior Vice President, Sales and Service OK. Paul, this is James. I will take your question. And I believe our recent robust sales performance has been largely contributable to our serious competitive advantage from its product strength and our adaptability and ability to make swift adjustments in responding to the market. Apart from the traditional sales channels in the second quarter, we ramped up our investment in online marketing resources, such as Douyin and other online platforms, achieving significant results as it brought our protest substantial increase in sales. Additionally, we are revolutionizing our sales system by giving more empowerment to regional level. This system allows each region to adopt regional sales strategy in a flexible approach on the condition of accomplishing profit target given by the company. This approach significantly enhances the sales potential to reach to each regional -- to each region. Last but not least, since June 2024, the NEV penetration rate in the RMB 200,000 and higher market has reached over 50%, which is a significant milestone. After this, I think the premium NEV industry will continue to consolidate, and I believe Li Auto will be one of the main beneficiaries during this process. Thank you. Paul Gong -- UBS -- Analyst [Foreign language] My second question is regarding the preparation work for the BEV models next year. Given the half-year adjustment of the launching time, will you adopt more new technologies, the latest technologies? And how much of the scale have you been preparing for the supply chain in terms of the capacity? Unknown speaker -- -- Analyst [Foreign language] Our plan is still to launch multiple 800-volt, high-voltage electric vehicles next year, 2025. In terms of R&D, everything is on track. So far, we have completed multiple rounds of low-volume trial production of prototype vehicles. And according to our testing and including, for example, high temperature, high community durability testing schedule, everything is going according to plan. And in terms of supply chain readiness, everything is also on track. The planned production capacity is sufficient to meet the sales target. And the factories for manufacturing vehicles have completed production -- completed construction. And the four major lines of stamping, welding, painting, and assembly are also under testing and installation, we are planning to have key components developed in-house on our electric vehicles, and these have also been going through performance testing. External suppliers and our partners have also been developing and building out their production capacity on track. Everything is going according to plan. So overall, we're very confident to deliver our best models next year according to plan. Operator Your next question comes from Yuqian Ding with HSBC. Yuqian Ding -- HSBC -- Analyst [Foreign language] So I got two questions. The first is, last season, management talked about the reallocate the model display in the channel to maximize the product mix and bring more exposure to the high-end model like L8. How does that go versus expectation? Second question is about -- there's been quite some restructuring adjustment in the first half. Could you refresh the full-year R&D expense guidance and highlight us change, if any? James Liangjun Zou -- Senior Vice President, Sales and Service OK, Yuqian. This is James. I will take your first question. As we open more stores in auto parks, the number of displays, both for L8, has gradually recovered. We also developed a new online sales channels, including Douyin, to ensure sufficient sales lead for L8. So now L8 sales has been steadily improving since April. Currently, it's mostly deliveries has recovered to the range of 6,000 to 7,000 units. Johnny Tie Li -- Chief Financial Officer This is Johnny. Well, for R&D, we expect the full-year GAAP R&D will be below RMB 12 billion. Operator Your next question comes from Jing Chang with CICC. Jing Chang -- CICC -- Analyst [Foreign language] So my first question is about -- still the distribution network. After the review of the first half of 2024, we have made a lot of improvements. So just as Mr. Li Xiang mentioned about the increased the proportion of the central stores, so can you share more about the detail behind the above changes about the logic and our sales on the distribution network expansion and also entering into the lower-tier cities? And also, what we should do more to prepare for the launch of the EV model next year? James Liangjun Zou -- Senior Vice President, Sales and Service OK. Jing Chang, this is James. I will take your question. So first of all, we are sticking to our direct sales model, and we are aiming to display all models in our showrooms, and that's what we are doing now. Our retail stores in auto parks have larger floor spaces and have the capacity to display nine to 11 vehicles, and we will display all of our models in these stores. So since -- at the start of this year, we have been making many adjustments toward our sales channels. We are gradually replacing low-performing stores in the shopping malls with retail stores in leading auto parks. We will continue to focus on the best auto parks in the top 150 cities and open large, high-quality stores there. In terms of our achievements so far, the proportion of our stores in auto parks has increased from 24% last year -- end of last year to 31% at the end of June 2024. We plan to further increase the proportion to close to 50% by end of this year. And regarding your question, that next year for the BEV when we launch our BEV models, so we will continue to increase the proportion of the car park stores next year, so to facilitate our display spots. The showroom capacity per store also improved, alongside the increased proportion of stores in auto parks. The number of showroom vehicles per store has increased from 4.6 units at the end of last year to 5.1 units at the end of June 2024, and we plan to further increase this metric to cover six units per store by end of this year. Our total number of showroom display score has increased from 2,642 at the end of last year to 2,919 at the end of June 2024. We plan to further increase this number to over 3,600 by end of this year. Thank you. Operator As we are reaching the end of our conference call now, I'd like to turn the call back over to the company for closing remarks. Ms. Janet Chang, please go ahead. Janet Chang -- Director, Investor Relations Thank you once again for joining us today. If you have further questions, please feel free to contact Li Auto's investor relations team through the information provided on our IR website. This concludes this conference call. You may now disconnect your lines.

Li Auto Inc. (LI) Q2 2024 Earnings Call Transcript

Tim Hsiao - Morgan Stanley Ben Wang - Deutsche Bank Tina Hou - Goldman Sachs Xu Yingbo - CITIC Securities Paul Gong - UBS Yuqian Ding - HSBC Jin Zhong - CICC Hello, ladies and gentlemen. Thank you for standing by for Li Auto's Second Quarter 2024 Earnings Conference Call. At this time, all participants are in listen-only mode. Today's conference call is being recorded. I will now turn the call over to your host, Ms. Janet Chang, Investor Relations Director of Li Auto. Please go ahead, Janet. Janet Chang Thank you, Kerry. Good evening and good morning, everyone. Welcome to Li Auto's second quarter 2024 earnings conference call. The company's financial and operating results were published in our 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, begin with prepared remarks. Our President, Mr. Donghui Ma; and Senior Vice President, 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 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 risks and uncertainties is included in certain company filings with the US Securities and Exchange Commission and the Stock Exchange of Hong Kong Limited. 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 discussions of unaudited US GAAP financial information as well as unaudited non-GAAP financial measures. Please refer to Li Auto's disclosure documents on the IR section of our website, which contain a reconciliation of the unaudited non-GAAP measures to comparable US GAAP measures. Our CEO will start his remarks in Chinese. There will be English translation after he finishes all his remarks. With that, I will now turn the call over to our CEO, Mr. Xiang Li. Please go ahead. The NEV penetration rate in China in July was approaching 50%, indicating higher adoption of smart electric vehicles versus ICE vehicles. As consumer increasingly favor leading brands with strong sales and substantial user bases, we expect the NEV market to further concentrate around top brands. In a complex and rapidly changing environment, in the second quarter, we achieved strong sales performance by focusing on user value and operating efficiency. We delivered more than 108,000 vehicles in the second quarter, representing an increase of 25.5% year-over-year. In the RMB200,000 and higher NEV market, our market share grew from 13.6% in Q1 to 14.4% in Q2, ranking first among domestic auto brands. Since June, we have remained the top-selling brand in RMB200,000 and higher SUV market in China across NEV and ICE vehicles. In terms of performance by model, all Li Auto models remained leaders in their respective market segments. In Q2, Li L7 and Li L8 claimed the top two spots in sales in the RMB300,000 and over large SUV NEV market, while Li L9 continued to be of top sales full-size SUV among users. Additionally, production and delivery for Li L6 continued to ramp up since its launch in April. Driven by its compelling product features and precise market positioning, Li L6 monthly sales deliveries -- monthly deliveries have consistently exceeded 20,000 units since June. Li L6 ranked second in sales in the RMB200,000 and higher passenger vehicle market, including both NEVs and ICE vehicles, only short of Tesla Model Y. Recently, we reached multiple delivery milestones. On June 21st, our cumulative deliveries exceeded 800,000 vehicles, making us the first emerging new energy auto brand in China to reach this milestone ever. In July, we set a new monthly delivery record of 51,000 units per month. On August 21st, our cumulative deliveries surpassed 900,000 units, an unprecedented achievement for Chinese premium auto brands. I would like to take this opportunity to express my gratefulness to each member of Li Auto and for their hard work, and also my gratefulness to all of our users for their recognition and support. In the second quarter of 2024, we recorded total revenues of RMB31.7 billion, up 10.6% year-over-year, while maintaining a healthy gross margin of 19.5%. We're confident that our operating performance will improve further in the second half of this year as Li L6 completes its production ramp-up and cost-reduction and efficiency improvement efforts come to fruition. Vehicle delivery is the only the beginning of a typical user journey. Through frequent OTAs, we continually add new features and optimize our user experience, allowing Li Auto vehicles to grow with our users. In July, we released OTA 6.0 and OTA 6.1 to all MEGA and L series users, introducing major improvements across autonomous driving, smart space, and smart electric drive features. I would like to highlight the substantial progress we made in autonomous driving. In July, we rolled out our HD mapless NOA to over 240,000 Li AD Max users. This version is no longer dependent on prior information and therefore can operate on almost all roads across all cities in China. Our HD mapless NOA is very well-received, which is also reflected in our accelerating order intake. Since this feature was introduced to beta users in May, the production -- proportion of NOA test drives has nearly doubled. Following the rollout of OTA 6.0, the daily user engagement rate of city NOA has nearly grown -- has increased nearly eight-fold and the average NOA mileage per user have almost tripled. As of now, over 99% of users use our autonomous driving features regularly with cumulative NOA mileage surpassing 1.11 billion kilometers. Additionally, user satisfaction and AD Max take rate are both increasing steadily. Our autonomous driving system continued to iterate quickly. On our autonomous driving summer launch event on July 5, we introduced the industry's first dual-system automatic -- autonomous driving solution, integrating an end-to-end model for E2E with a vision language model or VLM. We rolled out the new solution to approximately 1,000 data users by the end of July. The E2E and VLM models brought much stronger complex resolution and reasoning capabilities to our autonomous driving system. The ONE model approach also facilitates rapid iteration. Our early bird beta testing version iterates three to four times weekly with an average daily user engagement rate of over 70%. Additionally, we developed in-house reconstructed and generative world models for training and validation purposes. This new dual system architecture has many benefits, including more efficient inference, faster model iterations, and more human-like route planning, and better overall user experience. To cope with our growing product portfolio and greater number of vehicles owned, we continue to upgrade and expand our sales and servicing network. In Q2, we upgraded existing shopping mall stores and replaced some lower-performing ones with new sales centers located in major auto parks. The proportion of sales centers has increased to 31% with the total number of showroom display spots increasing by over 13% over the last quarter. As of July 31, 2024, we had 487 retail stores located across 146 cities, as well as 411 service centers and Li-authorized body and paint shops operating in 220 cities in China. Looking at our charging networks, as of August 27, we had 733 charging -- supercharging stations in operation with 3,428 charging stalls. Alongside the ongoing build-out of our own supercharging stations, we collaborated with a number of premium partners to launch the first batch of what we call LI SELECTION supercharging stations in July. We will continue to expand the coverage and increase the density of our supercharging network. This improves the charging experience for our users, allowing more families to choose Li Auto products with no concerns. Looking ahead to the third quarter of 2024, we expect vehicle deliveries to be between 145,000 to 155,000 units. As a growth-driven company, we're committed to creating products and services that exceed our users' expectations while strengthening our brand in the new energy and premium car market. In the first half of 2025, we expect to launch our battery-electric SUVs to serve a broader range of family users. With that, I will now turn it over to our CFO, Johnny, to walk you through our financial performance. Johnny Tie Li Thank you, Li Xiang. Hello, everyone. I will now walk you through some of our 2024 second 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 second quarter were RMB31.7 billion or $4.4 billion, up 10.6% year-over-year and 23.6% quarter-over-quarter. This included RMB30.3 billion or $4.2 billion from vehicle sales, up 8.4% year-over-year and 25% 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, mainly due to different product mix and pricing strategy changes. The sequential increase was mainly due to the increase in vehicle delivery, partially offset by the lower average selling price as a result of different product mix. Cost of sales in the second quarter was RMB25.5 billion or $3.5 billion, up 13.8% year-over-year and 25.3% quarter-over-quarter. Gross profit in the second quarter was RMB6.2 billion or $850 million, down 0.9% year-over-year and up 16.9% quarter-over-quarter. Vehicle margin in the second quarter was 18.7% versus 21% in the same period last year, and 19.3% in the prior quarter. The year-over-year decrease was mainly due to different product mix and pricing strategy changes, partially offset by cost reduction. The sequential decrease was mainly due to different product mix. Gross margin in the second quarter was 19.5% versus 21.8% in the same period last year and 20.6% in the prior quarter. Operating expenses in the second quarter were RMB5.7 billion or $785.6 million, up 23.9% year-over-year and down 2.7% quarter-over-quarter. R&D expenses in the second quarter were RMB3 billion or $416.6 million, up 24.8% year-over-year and down 0.7% quarter-over-quarter. The year-over-year increase was primarily due to increased expenses to support the expanding product portfolios and technologies as well as increased employee compensation as a result of the growth in the number of staff on a year-over-year basis. The sequential decrease was primarily due to decreased employee compensation, offset by increased expenses to support expanding product portfolios and technologies. SG&A expenses in the second quarter were RMB2.8 billion or $387.4 million, up 21.9% year-over-year and down 5.5% quarter-over-quarter. The year-over-year increase was primarily due to increased employee compensation as a result of the growth in the number of staff as well as increased rental and other expenses associated with the expansion of sales and servicing network. The sequential decrease was mainly due to decreased marketing and promotion activities and employee compensation on a quarter-over-quarter basis. And income from operations in the second quarter was RMB468 million or $64.4 million versus income from operations of RMB1.6 billion in the same period last year, a loss from operations of RMB584.9 million in the prior quarter. Operating margin in the second quarter was 1.5% versus 5.7% in the same period last year, and negative 2.3% in the prior quarter. Net income in the second quarter was RMB1.1 billion or $151.5 million, down 52.3% year-over-year and up 86.2% quarter-over-quarter. Diluted net earnings per share per ADS attributable to ordinary shareholders was RMB1.05 or $0.14 in the second quarter versus RMB2.18 in the same period last year and RMB0.56 in the prior quarter. And turning to our balance sheet and cash flow. Our cash position remained strong and stood at RMB80 -- RMB97.3 billion or $13.4 billion as of June 30, 2024. Net cash used in operating activities in the second quarter was RMB429.4 million or $59.1 million versus net cash provided by operating activities of RMB11.1 billion in the same period last year and net cash used in operating activities of RMB3.3 billion in the prior quarter. Free cash flow was negative RMB1.9 billion or negative $254.9 million in the second quarter versus positive RMB9.6 billion in the same period last year and negative RMB5.1 billion in the prior quarter. And now for our business outlook, for the third quarter of 2024, the company expects the deliveries to be between 145,000 and 155,000 vehicles, representing a year-over-year increase of 38% to 47.5%. The company also expects third-quarter total revenues to be between RMB39.4 billion and RMB42.2 billion or $5.4 billion and $5.8 billion, representing a year-over-year increase of 13.7 billion to 21.6%. This business outlook reflects the company's current and preliminary view on its business situation and market conditions, 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. [Operator Instructions] Your first question comes from Tim Hsiao with Morgan Stanley. So my first question is about the autonomous driving. I think the Li Auto is diving into the NTM autonomous technology and expanding the team aggressively, how would Li Auto evaluate the return and efficiency of such ambitious investment? What could be the more relevant metrics for investors to assess the result and commercialization progress of the auto NTM autonomous driving technology? That's my first question. Thank you. Since the beginning, our investment yield on autonomous driving has always been pretty high. And in terms of operating metrics, we'd like to focus on two key results. One is whether our user is willing to use it and second is whether the user is willing to pay for it. So on the user front, metrics include the percentage time used or percentage mileage used. And since we launched HD mapless NOA in July, users' usage rate has been increasing steadily as shown by both the daily active rate and the mileage driven have both increased manyfold. On the market front, the improvement in NOA has positive effects on adoption rate. Since for potential users who come to our stores, the percentage of users who take NOA on test drives has increased more than twice. And the percentage of NOA AD Max take rate on every model has also been increasing, especially cars priced above RMB300,000, the percentage of AD Max take rate has already approached 70%. And we believe that VLM and E2E model marks the beginning of establishing entry barriers in terms of R&D for autonomous driving because we believe that this generation is real AI-powered autonomous driving. And AI further relies on large amounts of data and computing power. So, only companies with the ability to invest in this data and training capability and also have a large enough user or vehicle base are able to become bigger and bigger in autonomous driving. And this improvement in autonomous driving will then further increase sales overall and also the number of AD Max equipped vehicles. And this further in return allows us to invest even more in autonomous driving. So this is a very positive snowball effect. My second question is about the competition. Could the management comment on the ongoing competition between and Li Auto and Huawei? How do we expect the competitive landscape to evolve into second-half as both brands like Li Auto and AITO keep striving for the top spot in family SUV market with advanced smart driving features? That's my second question. Thank you. So first of all, HIMA is our biggest competitor in the market and our view is that we will continue to coexist with HIMA in the long-term in a very healthy fashion. And our attitude has always been to continually learn from Huawei, especially its R&D system and methodologies in operations and management as for us as a startup company to have such a model to learn from is very critical. Your next question comes from Ben Wang with Deutsche Bank. I've got two questions. Number one is about the margin guidance for this year. Did you maintain a full-year 20% gross margin guidance? Especially for the third quarter, basically, you mentioned that the AD Max version proportion increased to more than 70%. Is that going to be increasing the product mix, I mean the third-quarter gross margin -- vehicle gross margin back to 20%? That's the first question. The second question is about your pure EV products. This is where you have been postponed vehicle by almost half a year. Did you change the design, especially the exterior design because for some of the style feature, it showed like design did not yet. Most of the customers prefer to change the standard design to differentiate from the MEGA design. Can you provide any comment on that? Thank you. Johnny Tie Li Hello, Ben, and this is Johnny. I will take the first question. I think last quarter we guided vehicle margin of around 18%. Actually, finally, we deliver 18.7% and this is effort of the company and also the product mix and the delivery -- the final delivery. So for the third quarter, we believe our vehicle marketing will come back a little bit around -- it will be over 19% and the total gross margin will be above 20% in the third quarter. Thank you. Li MEGA has been a great validation of our capabilities in 800 volt high-voltage drivetrain and also our R&D capabilities in this area, including the drivetrain efficiency of our high-voltage platform and also the end-to-end charging experience and capabilities. And as we make improvements in autonomous driving, we have also become a Tier 1 player in autonomous driving. And similarly, our competitiveness in smart cockpit or smart space has also been very strong historically. So for our best SUVs, we really only need to solve two important problems. The first one is overall styling of the product. And the second one is to make sure that we have well over 200,000 charging stations by the time we start deliveries of our product. So overall, we are pretty confident in the competitiveness of our best electric SUVs, and we -- our plan or our goal is to become a Tier 1 player in the premium BEV market in two years' time. Your next question comes from Tina Hou with Goldman Sachs. So, thanks management for taking my question. First question is regarding our competition strategy into the second half of the year. So especially given that we don't have any new model launches for the second half, how are we expecting to maintain or even improve our sales volume? The second question is, since earlier this year, management has lowered overall volume guidance to a low end of 560,000 units for the full year 2024. However, we also gave a quite high CapEx guidance at around RMB15 billion, I think, in first quarter. So given the lowered volume guidance, how should we think about the pace of capacity expansion as well as new CapEx guidance? Thank you. James Liangjun Zou Hi, Tina. This is James. I will take your first question. New models are only one of the reasons contributing to sales growth. And from my point of view, efficient sales operations is another way to promote sales and that's what we are doing now. And looking forward, we will continue to optimize the deployment of our stores while strengthening our capability to gain online need. This will open the door to higher possibilities of sales growth while enhancing the efficiency of sales operations. In addition, our recently increased publicity of autonomous driving also facilitated sales growth, in particular, the sales of AD Max models. As the results show, our market share in the RMB200,000 and higher NEV market increased to 14.4% in second quarter 2024 from 13.6% in the first quarter. We aim to grow our market share in this segment further to 16% in the last quarter this year. Johnny Tie Li I think -- Tina, this is Johnny. And I think with James has just mentioned, 16% market share on the NEV market above RMB200,000. And if we assume a healthy passenger vehicle market in the second half of this year, we are very confident our full-year delivery will finally over 0.5 million delivery vehicles. And for the CapEx, we have optimized our CapEx pace. And in the beginning of this year, we estimate the CapEx is about $2 billion. And currently, we estimate the CapEx will be $1.1 billion to $1.2 billion. And for the free cash flow and for June and July, the free cash flow has been positive. And with going -- with the optimization of the CapEx investment and also the improvement of the operational efficiency, we are very confident that our free cash flow will come back to positive starting from the third quarter. Your next question comes from Xu Yingbo with CITIC Securities. And so I have two questions. The first question is about end-to-end autonomous driving. So what's our view about our future plan all in this area? And the second question is about robotaxi, how we see this trend? Thank you. First of all on the end-to-end VLM model, the iteration rate and performance actually exceeded our operations. Since we began our 1,000 early bird testing program in July, in less than a month, the model has gone through nine iterations, on average a new iteration every 34 days. The amount of data used for training has also increased from 1 million clips at the beginning to 2.3 million clips currently, and the model capabilities has also been increasing along the way. Many of our early bird testing users have posted many videos of their end-to-end driving on social media to showcase the great performance on city roads. The rapid iteration of the model can -- won't be possible without high -- highly efficient and automated testing capabilities. And we rely on world models to build a simulation testing system. In this system and using user feedback and using real-world scenario reconstruction and generative technologies, we have built a pull of a library of mistakes and testing scenarios for our models to make sure that our models are most fully tested and trained. This testing program can rate the models in terms of safety, comfort, and many other dimensions. And we believe that there has been a fundamental change in autonomous driving R&D that has increased from feature iteration to model capability iteration. And the speed of iteration is highly dependent on whether we have high-quality and large amounts of -- high-quality data and large amounts of computing power. And also what I mentioned earlier, which is the automated simulation testing program. So our end-to-end VLM system, we we're planning -- for this system, we're planning to launch a greater scale or approximately 10,000 user scale testing program starting in September. And on your question regarding robotaxi, our view interestingly is that as we reach Level 4 autonomous driving, the demand for taxi -- for ride-hailing and taxi and will actually decrease. And obviously, the market will take more time for us to observe and to see how it develops in the future. So we have seen recent weak consumption sentiment in China, but the auto sales series continue to grow in terms of the sales volume. In the environment of the government stimulus as well as certain pricing adjustments upwards by the German premium brand, have you seen the competitive environment in the high-end market has sequentially improved recently? James Liangjun Zou Okay, Paul, this is James. I will take your question. And I believe our recent robust sales performance has been largely contributable to our Li series competitive advantage from its product strength. And our adaptability and ability to make swift adjustments in responding to the market. Apart from the traditional sales channels in the second quarter, we ramped up our investment in online marketing resources such as Douyin and other online platform, achieving significant results as it brought our process substantial increase in [sales leads] (ph). Additionally, we are revolutionizing our sales system by giving more empowerment to regional level. This system allows each region to adopt regional sales strategy in a flexible approach on the condition of accomplishing profit targets given by the company. This approach significantly enhances the sales potential to reach to -- each regional -- to each region. Last but not least, since June 2024, the NEV penetration rate in the RMB200,000 and higher market has reached over 50%, which is a significant milestone. After this, I think the premium NEV industry will continue to consolidate and I believe the auto will be one of the main beneficiaries during this process. Thank you So my second question is regarding the preparation work for the BEV models next year. Given the half-year adjustment of the launching time, will you adopt more new technologies, the latest technologies, and how much of the scale have you been preparing for the supply chain in terms of the capacity? Our plan is still to launch multiple 800-volt high voltage pure electric vehicles next year, 2025. In terms of R&D, everything is on track. So far, we have completed multiple rounds of low-volume trial production of prototype vehicles. And according to our testing and including, for example, high-temperature, high humidity durability testing schedule, we -- everything is going according to plan. And in terms of supply-chain readiness, everything is also on track. The planned production capacity is sufficient to meet the sales targets. And this -- the factories for manufacturing these vehicles have completed production -- completed construction and the four major lines of stamping, welding, painting, and assembly are also under testing and installation. We are planning to have key components develop in-house on our BEV electric vehicles and these have also been going through performance testing. External suppliers and our partners have also been developing and building out their production capacity on track. Everything is going according to plan. So overall, we're very confident to deliver our BEV models next year according to plan. Your next question comes from Yuqian Ding with HSBC. So, I got two questions. The first is, last season management talked about the reallocate the model display in the channel to maximize the product mix and bring more exposure to the high-end model like L8. How does that go versus the expectation? The second question is about, there's been quite some restructuring and adjustment in the first half. Could you refresh the full year R&D expense guidance and highlight us, change if any? Thank you. James Liangjun Zou Okay, Yuqian. This is James. I will take your first question. As we open more stores in auto parks, the number of display spots for L8 has gradually recovered. We also developed the new online sales channels including Douyin to ensure sufficient sales leads for L8. So now L8 sales has been steadily improving since April. Currently, its monthly deliveries has recovered to the range of 6,000 to 7,000 units. Johnny Tie Li Hi, this is Johnny. For R&D, we expect the full year GAAP R&D will be below RMB12 billion. Thank you. Your next question comes from Jin Zhong with CICC. So my first question is about the distribution network. After the review of the first half of 2024, we have made a lot of improvements. So just as Mr. Li Xiang mentioned about, we increased the proportion of the central stores. So can you share more about the detail behind the above changes about the logic and our [stance] (ph) on the distribution network extension and also entering into the lower tier cities. And also what we should do more to prepare for the launch of EV models next year. James Liangjun Zou Okay, Jin Zhong, this is James. I will take your question. So first of all, we are speaking to our direct sales model, and we are aiming to display all models in our showrooms. And that's what we are doing now. And our retail stores in all auto parks have larger floor spaces and have the capacity to display 9 to 11 vehicles. And we will display all of our models in these stores. So since the start of this year, we have been making many adjustments towards our sales channels. We are gradually replacing low performing stores in the shopping malls with retail stores in leading auto parks. We will continue to focus on the best auto parks in the top 150 cities and open large high-quality stores there. In terms of our achievements so far, the proportion of our stores in auto parks has increased from 24% last year -- end of last year, to 31% at end of June 2024. We plan to further increase the proportion to close to 50% by end of this year. And regarding your question that next year for the BEV, when we launch our BEV models, so we will continue to increase the proportion of the car park stores next year, so to facilitate our display spots. The showroom capacity per store also improved, alongside the increased proportion of stores in auto parks, the number of showroom vehicles per store has increased from 4.6 units at the end of last year to 5.1 units at the end of June 2024. And we plan to further increase this metric to cover six units per store by end of this year. Our total number of showroom display ports has increased from 2,642 at the end of last year to 2,919 at the end of June 2024. We plan to further increase this number to over 3,600 by end of this year. Thank you. As we are reaching the end of our conference call now, I'd like to turn the call back over to the company for closing remarks. Ms. Janet Chang, please go ahead. Janet Chang Thank you once again for joining us today. If you have further questions, please feel free to contact the Li Auto's Investor Relations team through the contact information provided on our IR website. This concludes this conference call. You may now disconnect your line. Thank you.

Earnings call: Kanzhun Limited sees steady growth in Q2 2024 By Investing.com

Kanzhun Limited (ticker: BZ), the company behind the popular online recruitment platform BOSS Zhipin, has reported its financial results for the second quarter of 2024, showcasing significant growth. The company's calculated cash billings reached RMB1.95 billion, marking a 20% increase year-over-year (YoY), while its GAAP revenue rose by 29% YoY to RMB1.92 billion. Kanzhun Limited's net profit was RMB420 million, with an adjusted net income of RMB720 million, up 26% YoY. The platform's average verified monthly active users grew by 25% YoY to 54.6 million, and it saw a 31% YoY growth in its total paid enterprise customers, reaching 5.9 million. Looking ahead, Kanzhun Limited expects total revenues for the third quarter of 2024 to be between RMB1.9 billion and RMB1.92 billion, an increase of 18.2% to 19.5% YoY. Kanzhun Limited's strategic focus on user growth, cost control, and market expansion, coupled with a cautious approach to emerging technologies like generative AI, positions the company for continued success in the competitive online recruitment space. With a solid financial performance in Q2 2024 and a clear vision for the future, Kanzhun Limited is reinforcing its commitment to growth and shareholder value. Investors and industry watchers can look forward to further developments and can direct any additional questions to the company's investor relations team. As Kanzhun Limited (ticker: BZ) continues to navigate the competitive landscape of online recruitment, its financial health and market performance provide valuable insights for investors. With a market capitalization of $6.15 billion, the company's valuation reflects its standing in the industry and investor confidence. InvestingPro Data shows a Price-to-Earnings (P/E) ratio of 42.74, suggesting a premium market valuation compared to earnings. However, when adjusted for the last twelve months as of Q1 2024, the P/E ratio becomes more attractive at 26.25, indicating potential for growth in the eyes of investors. The PEG ratio for the same period stands at a remarkably low 0.04, hinting at a potentially undervalued stock given the company's earnings growth rate. Moreover, Kanzhun's Revenue Growth is notable, with a 37.14% increase over the last twelve months as of Q1 2024, underscoring the company's successful expansion strategies. This is further supported by a Gross Profit Margin of 82.63%, demonstrating strong operational efficiency and the ability to maintain profitability. InvestingPro Tips highlight the importance of considering these metrics in conjunction with recent price performance. Despite a robust financial showing, the company's 1 Month Price Total Return is at -20.42%, and the 3 Month Price Total Return shows a significant drop of -46.4%. These figures may point to market volatility or investor concerns that could be worth monitoring. For investors seeking a comprehensive analysis of Kanzhun Limited's financial health and stock performance, InvestingPro offers additional tips that delve deeper into these metrics. Currently, InvestingPro has a total of 12 additional tips available for investors who want to further explore the company's investment potential. Operator: Ladies and gentlemen, thank you for standing by and welcome to the Kanzhun Limited Second Quarter 2024 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a Q&A session. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Wenbei Wang, Head of Investor Relations. Please go ahead, ma'am. Wenbei Wang: Thank you, operator. Good evening, and good morning, everyone. Welcome to our second quarter 2024 earnings conference call. Joining me today are our Founder, Chairman and CEO, Mr. Jonathan Peng Zhao; and our Director and CFO, Mr. Phil Yu Zhang. Before we start, we would like to remind you that today's discussion may contain forward-looking statements, which are based on management's current expectations and observations that involve known and unknown risks, uncertainties and other factors not under the company's control, which may cause actual results, performance or achievements of the company to be materially different. The company cautions you not to place undue reliance on forward-looking statements and do not undertake any obligation to update this forward-looking information except as required by law. During today's call, management will also discuss certain non-GAAP financial measures for comparison purposes only. For definition of non-GAAP financial measures and the reconciliation of GAAP to non-GAAP financial results, please see the earnings release issued earlier today. In addition, webcast replay this conference call will be available on our website at ir.zhipin.com. With that, I will now turn the call to Jonathan, our Founder, Chairman, and CEO. Jonathan Peng Zhao: [Foreign Language]. Hello everyone. Thank you for joining our company's second quarter 2024 earnings conference call. [Foreign Language]. I will start with our financial numbers. In the second quarter, the company achieved calculated cash billings of RMB1.95 billion, up 20% year on year. Our GAAP revenue reached RMB1.92 billion, up 29% year on year. We recorded a net profit of RMB420 million. Meanwhile, our adjusted net income, which excludes share based compensation expenses, rose to RMB720 million, up 26% year on year. In the second quarter, the average verified MAU on the BOSS Zhipin app grew by 25% year on year to 54.6 million. From January to June this year, the company attracted around 28 million newly added verified users. The total paid enterprise customers in the 12 months ended June 30, 2024, reached 5.9 million, representing 31% year-on-year growth. [Foreign language]. Our cash bookings in the second quarter still have a decent year-on-year growth. However, weaker on a quarter on quarter basis and, and a little bit lower than our expectation. This was mainly due to weaker demand from the recruitment side in the later half of the second quarter. There were relatively fewer enterprise users and more job seekers in the market, which is what we refer to as a high CB ratio. In this case, most enterprise users found it easier to hire for example, a project team that took three months to fill all the positions in the past now only takes two months reducing enterprise users desire to spend more money on recruitment. [Foreign language]. We noticed that the growth trend of enterprise users is still good. There are two proofs. First, in the second quarter, the number of newly added enterprise users was higher than that of the same period last year. Second, the average monthly active user of enterprise users increased by 17% year on year. Investors who have long been following us know that user growth is the core growth driver for our revenue growth. We still have a good growth of enterprise users in the second quarter. This is the good news for the company. [Foreign language]. We believe the second quarter performance is a temporary situation. Long-term structural growth opportunities remain strong. Our confidence is grounded in three factors. First, the Chinese market is a huge economy with the highest small and medium-sized enterprise activities and the largest number of enterprises. Second, there is a persistent shortage of labor supply, particularly among younger generations, which is unlikely to change in the near future. Third, our efficient service model is best suited to address the challenges presented by the first two factors. [Foreign language]. On the current situation the company's management team believe we should do what is best suited for the moment. Today, I'll talk about three things. [Foreign Language]. The first thing is to ensure the full-year profit target. During challenging times, confidence is crucial for everyone, no matter co-investors, co-employees, or potential investors, and the prospective talent. In tough times, confidence is more valuable than growth, ensuring profitability for the year will help to sustain confidence in the company, which can be achieved through further refinement of our management. [Foreign Language]. The second thing is to invest more resources on new growth driver. For example, in the blue-collar manufacturing industry, there may be some new dollars. [Foreign Language]. To briefly review the blue-collar manufacturing industry, we had talked before. The background is the complex relationship between factories, workers, platforms, and agents. In addition to many historical issues, have made it challenging for online platforms to serve the blue-collar manufacturing industry. [Foreign Language]. The history is, three years ago, we started by purifying the job-seeking and recruitment environment through what we call the coach [ph] project hard work [Indiscernible]. The intuition of this initiative has two. First is to protect the overall pro job seeking process of the job seeker. Second was to help blue-collar agents and organizations make money recently. [Foreign Language]. The current situation is after a tough game, the longstanding issue of bad or low-quality agents driving out good ones across online recruitment platform is beginning to improve. This positive shift has already happened. Good guys who commit to job seekers with integrity, posting authentic job details and salary information, and now receiving better results, we have named agents as platform-certified country select. [Foreign Language]. The latest data is our core select project generated over RMB40 million in revenue in the second quarter, which is much higher than that in the first quarter. This good science makes me feel that our strategy and the persistence in the few years [Indiscernible]. [Foreign Language]. The third thing is our overseas business. As we all know, economies are cyclical and this economy cycles are often out of sync across different countries and regions. Large companies with a strong global presence can effectively utilize this regional big shift to support sustainable growth. In particular, fostering has pioneered our current model globally. This model is very likely to provide value and gain space for survival and the development in various regional market through localization, hybridization, and evolution. While we're seeing promising progress in Europe and Asia, it's still too early to report results. [Foreign Language]. Last but not least, it's important to address confidence again particularly in terms of strengthening the returns for our shareholders who have constantly supported us since our IPO. For example, we'll continue to increase our share payback efforts. We have bought over US$88 million we purchased in the past four months. This all will help to reinforce the valuable confidence of our shareholders and management [Foreign Language]. That concludes my part of the call. I'll now turn it over to our CFO, Phil for the overview of our financial. Thank you. Phil Yu Zhang: Thanks, Jonathan. Hello, everyone. Now let me walk you through the details of our financial results of the second quarter of 2024. In this quarter, we delivered healthy and a sustainable top-line and bottom-line growth. Calculated cash billings and the revenues grew by 20% and the 29% year on year respectively, mainly driven by the growth of our enterprise users average monthly active enterprise users in the quarter grew by 17% year on year. We continued to penetrate into different categories of users, especially in blue-collar sectors, small, medium-sized enterprises, and users from lower-tier cities. As a result, revenue contributions from those sectors continue to increase. Paid enterprise customers in the 12-month ended June 30, 2024 increased by 31% year on year to 5.9 million. The paying ratio was higher than last year, but sequentially kept stable. We are happy to see that ARPPU average paying per paying user of paid users increased around 3% year on year and 3% sequentially reaching the highest level in the past four quarters. Part of the reason was that revenue from key accounts out grew small and middle-sized accounts, but more importantly, was our effort to increase client usage by offering high quality and targeted products and services. Moving to the cost and expensive side, excluding share-based compensations, adjusted operating cost and expenses increased by 20% year on year to RMB1.3 billion, and that led to an adjusted operating profit of RMB660 million in the quarter, up 52% year on year. Adjusted operating margin reached a 34.4%, up by 5.3 percentage points compared to the same quarter of last year, and a hit an all-time high. Cost of revenues increased by 17%, year on year to RMB317 million, in this quarter representing a gross margin of 83.5% continued its upward trend. Sales and marketing expenses increased by 16% year on year to RMB545 million in this quarter. This increase was mainly driven by our enhanced investment in customer acquisition, as well as higher sales commissions. R&D expenses increased by 21% year on year to RMB444 million in this quarter. Excluding share-based compensations expenses, adjusted R&D expenses increased by 28% year on year to RMB334 million. This increase was primarily driven by our earlier investments in AI infrastructure, which generated a higher depreciation cost. Our G&A expenses increased by 29% year-on-year to RMB261 million in this quarter. Adjusted G&A expenses increased by 21% year-on-year to RMB153 million, mainly due to increased employee-related expenses. Our net income was RMB417 million in this quarter up 35% year-on-year, and our adjusted net income in this quarter reached the RMB719 million and increased by 26% year-on-year. We expect that our share-based compensation expenses reached the peak level in this quarter and will gradually decline in the coming quarters. We are now reviewing stock compensation scheme and studying some schemes which might even accelerate the process. Net cash provided by the operating activities grew by 14% year-on-year to RMB869 million for this quarter. As of June 30th, 2024, our cash and cash equivalent, short-term time deposits and short- term investments totaled as RMB14.3 billion. Notably, in the past four months, we have repurchased a total consideration of US$88 million, which demonstrated our commitment in shareholders return and long-term confident of our business. And now for our business outlook. For the third quarter of 2024, we expect our total revenues to be between RMB1.9 billion, and RMB1.92 billion a year-on-year increase of 18.2% to 19.5%. That concludes our prepared remarks and the way we would like to answer questions. Operator, please go ahead with the queues. Operator: [Operator Instructions]. Our first question comes from Timothy Zhao with Goldman Sachs (NYSE:GS). Your line is open. Timothy Zhao: [Foreign Language]. Thank you for taking my question. I have two questions here. The first is regarding your user growth and market share. How does management team view the market share currently and in the adverse market environment currently? Are we considering to further accelerate the market share gain? And second, as we mentioned to ensure the full year profit this year, could management share what is your detailed measure and what is your OpEx, including the SPC trend for the rest of this year? Thank you. Jonathan Peng Zhao: [Foreign Language]. Thank you for your question. For the first one regarding competition, the current competitive landscape is relatively stable, or we rather say, we have relatively good competitive advantages, and there are many third-party data and our own data have to prove that. [Foreign Language]. For example, we just mentioned, our MAU and DAU all achieved a historical high in the second quarter. The user activities, for example, the DAU and MAU ratio still remain at a very high level. So, in the same case for the user usage time, so all of those data prove that as a leading online recruitment platform every perspective, our competitive landscape is really stable and continued in a good trend. [Foreign Language]. And in terms of guaranteed a full year profit target. So, we believe is very critical for our core employees, for our management to have this target. This is part of our competence and is a testify further this firm is very stable and strong. So, on a strategic perspective, the first way is our full-year user growth target is RMB40 million to RMB45 million. And in the first six months, the first half of this year, we have already achieved RMB28 million. So, there are, only RMB12 million to RMB17 million left for us to grow. It should be relatively easy to achieve so we can control our overall spending on marketing to properly achieve our profit target. Second, under current circumstances, we want to better use our resources and to move the priority of those project initiatives with lower success rate and higher target, to postpone it resource usage and prioritize the importance of reducing the overall cost. And this can be achieved through internal management and with we believe this very high level of certainty in terms of detailed data I think Phil can give you some more color. Phil Yu Zhang: Regarding our bottom line and major cause and the expenses item, I'll quickly mention our thoughts. As Johnson just mentioned, we would like to try our best to secure our operating profit, the target, our target for full year of non-GAAP operating profit is set as RMB2.3 billion, which is roughly up 40% year over year, on top of the last year's adjusted non-GAAP adjusted operating profit. So, in terms of our gross margin, our gross margin will in third quarter or following quarters, we'll stay flat or slightly improve due to higher economy of scale. And our marketing expenses, as Johnson mentioned will be controlled, and at relatively low level. Our selling expenses and G&A expenses, those items all be moderate and in a reasonable situation. And in terms of the R&D expenses, because of, we probably will shift our priority from some like AI-related infrastructure investments into other things. So, from third quarter or from second half this part, the expenses will decrease. So altogether our operating margin will increase second half and versus the full year operating margin versus last year will also be better. Thank you. Jonathan Peng Zhao: [Foreign Language]. For the market share, which a lot of investors are concerned and asked a lot about. We actually after experiencing the years past, we notice that on the current situation, every dollar we spend there will be more job seekers and less enterprise users. The CPU [ph] ratio is currently is a challenge for the platforms who is based on the supply and demand balance of both sides. So, from this perspective, to keep the balanced civil ratio, we actually, we don't need to spend money too aggressively and that's my view to share. In addition to increase the dollar market share on the enterprise user side, currently, the overall paying desire of the enterprise are not that strong. The best and most effective way to enlarge our enterprise market share is to start a price wall. And currently it is a tough, it's a time to do that, but I'm not planning to take even more shares by lowering our price. I don't think this is a meaningful thing to do at current situation. And that's my view to share. Thank you, operator. Let's move on to the next question. Operator: Thank you. Our next question comes from Eddy Wang with Morgan Stanley (NYSE:MS). Your line is open. Eddy Wang: [Foreign Language]. Thank you, management, for taking my question. We understand that the macro situation seems second quarter has been relatively weak, so just want to hear your view that have you witnessed any improvement in the recruitment demand in August versus June and July? And how's the performance of different industries and different the enterprise of different skills? And the second question is, if the micro continues to be relatively weak will we have any change in the business strategy to offset the macro impact? Jonathan Peng Zhao: [Foreign Language]. First, we cannot talk about the macro, but we can share with our own situation, which we observed from our website and app. First one is, in the second quarter, the overall willingness to pay from recruit recruiters are lowering. And secondly, the blue-collar growth is still white collar that why it's still fits. [Foreign Language]. And let's further look into blue-collar. There are several observations we can share with you. The first observation is that the overall blue-collar recruitment demand reached peak historically high in the spring festival recruitment season, but just fall back relatively faster in the second quarter. [Foreign Language]. Even relatively factor pullback in second quarter, we still see a very good year-over-year growth in terms of the blue-collar revenue in the second quarter. And among the detailed sub-sectors, there is one highlight, which is, uh, the factory industry continues to outperform all other industries. And after that is logistics sector. [Foreign language]. And there are also other two observations worth sharing. First, compared to the first-tier cities, the recruiter's enterprise user growth is better and faster in the second, third, fourth-tier cities. And the second one is, there is a continued trend, which we have already discussed in the last quarter results that to the larger size of the enterprise grow better. For example, big enterprise with over 10,000 employees, at the companies with the fastest or the faster growth rate. [Foreign language]. And about recent situation in August, we'll continue to talk about blue-collar. So blue-collar the overall supply and demand situation in August is better than the second quarter. And the enterprise-to-job seeker ratio continued to see improvement. And we observed the daily active enterprise user number continue to go up week by week. And the manufacturing industries are still the best among all others. [Foreign Language]. And the second question about what kind of monetization strategy we can use to against the macro headwinds, the things we are currently doing first is to concentrate our resources to the business and department, which we -- because faster outlook -- longer outlook, we give limiter to. For example, on the blue-collar manufacturing industry, we from [Indiscernible] project to contract and to generate revenues, we are currently enhancing our investment and input on this area. [Foreign Language]. I cannot be so very certain to say that the [Indiscernible] project will have very big revenue from our corporation with blue collar manufacturing industry in the third and fourth quarter of this year. But we believe this is the first real chance actual change for the online recruitment platform to go into the blue-collar manufacturing industry and make some real money. And that's my answer to your question. Operator: Our next question comes from Robin Zhu with Bernstein. Your line is open. Robin Zhu: [Foreign Language]. So, I have two questions. One, would management elaborate on recent developments in the company with regards to the WD acquisition. If management could give us more color on over the seas and investments in AI. And second, given the weakness in the company's shares in recent times, could management share some thoughts on go-forward buybacks. And whether the company will consider instituting a regular dividend. Thank you. Jonathan Peng Zhao: [Foreign Language]. Thank you for your question. The first question was the over WD technology, I have mentioned that conference call before and because the Jason the CEO is a very respectful peers of ours and the reception in 2015 until now. And they be able to become the number one in their own areas. So, to purchase the majority of the shareholder stake of WD technology is out of the recognition and the respect of Jason and his team work in this area. And it's not just us for expansion into the area is more likely to add ourselves with some capabilities, which is difficult for we to develop ourselves. [Foreign Language]. Jason and his team we fully recognize his knowledge and the industry actually has fully recognized their knowledge knowhow and model in the manufacturing industry. And currently, he's working with us for three things. First of all, they are fully independently to lead the development of capabilities. [Foreign Language]. And the second thing is to help the company to push forward the overall environment improvement under the couch project and the monetization, the commercial project -- commercial plan under the com select [ph] project. [Foreign Language]. And the third one, which is not simple to discuss more details publicly at this moment is that Jason is currently leading the operational team of WD technology and part of our R&D team together combine the advantages of our traffic and their experience and the know-how in industry to combine together to publish new product or service, which we were rather looking forward to that, but maybe in the next quarter. [Foreign Language]. And for our overseas business, first for our Hong Kong initiatives, we have made some progress and have initially achieved -- published MEP service to serve quarter in Hong Kong and see how the users might react behave on our platform. This might take 2 months to 3 months, and then we will decide whether we can accelerate the development of this business. And in terms of the revenue, which a decent revenue from Hong Kong business, I think it's a little bit early, maybe more than the next 2 years to 3 years. And in the Asia and Europe area, we -- and some developed countries, we have take quite a long time to [indiscernible]. And the account date, what I can say is that I'm satisfied with the local team we have recruited, and we are confident. [Foreign Language]. And the third one regarding the generative AI. I have shared some of our thoughts before and maybe some as a mood here. So, there are two points. First, in a scientific perspective, we are excluding a tail light project, which is for our research guys, our tech guys to understand to know what the most developed technology in this area is and what they are doing. But we are not planning to invest more resources. Actually, we can -- we're not affordable to do that to actually do that. So, we just know what they are doing and kept up with the most advanced technology. [Foreign Language]. On the application level, so our strategy is still are if something are not happening before the emerge of generative AI technologies, then we give priority to that. So, under that strategy, we have some good application in the industry level. So, we are using it internally now. [Foreign Language]. And about the shareholder returns, we have long been insisted on providing shareholder return to our shareholders, which I believe is a basic asset for the company, and we always attach good importance to that. So, which -- because it is a very true problem -- we are a crucial point for the core shareholders and the employees to maintain our strong confidence. So, it's very essential and important to do a good shareholder return project. So, we have $200 million share buyback program and in the last 4 months, we have already bought $88 million. This is a real number, and we act we have done for our size of -- for a company of our size, and we will continue to do that. [Foreign Language]. And about the data, I can say that for a potential dividend pay plan, we are still start on the research. And that's my answer to your question. And given the time constraints, I think that's the last question for call operator. Operator: Thank you. Due time constraints, that concludes today's question-and-answer session. At this time, I will turn the conference back to Wenbei for any additional or closing remarks. Wenbei Wang: Thank you once again for joining us today. If you have any further questions, please contact our IR team directly or zhipin [ph] Net Relations. Thank you. Operator: Thank you. You may now disconnect. Good day.