EHang Holdings Limited (EH) Q3 2020 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. Thank you for standing by, and welcome to the EHang Third Quarter 2020 Earnings Conference Call. [Operator Instructions]. As a reminder, we are recording today's call. If you have any objection, you may disconnect at this time. Now I will turn the call over to Julia Qian, Managing Director of The Blueshirt Group Asia. Ms. Qian, please proceed.

Hello, everyone. Thank you all for joining us on today's conference call to discuss the company's financial results for the third quarter of 2020. We released the results early today. The press release is available on the company's website as well as from Newswire services. On the call with me today are Mr. Hu Huazhi, Chief Executive Officer; Mr. Edward Xu, Chief Strategy Officer; and Mr. Richard Liu, Chief Financial Officer. Before we continue, please note that today's discussion will contain forward-looking statements made under the safe harbor provision of the U.S. 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 expectations expressed today. Further information regarding these and other risks and uncertainties is included in the company's public filing with the SEC. The company does not assume any obligation to update any forward-looking statements, except as required under applicable law. Also, please note that unless otherwise stated, all the figures mentioned during the conference call are in Chinese RMB. With that, let me now turn the call over to our CEO, Mr. Hu Huazhi. Mr. Hu will speak in Chinese, then our CSO, Edward, will translate his comments into English. Please go ahead, Mr. Hu.

Well, I'll do the translation for Mr. Hu. Hello, everyone, I'm Huazhi Hu, Founder and CEO of EHang. As a first mover in the global UAM industry, we have already delivered over 100 units of EHang 216 passenger-grade autonomous aerial vehicles, or AAVs, cumulatively in China and in the world. We have completed near 10,000 safe flights worldwide with zero accidents. This is an amazing accomplishment for such an innovative passenger-grade AAV. Our proprietary full redundancy safety systems have been fully testified by the abundance of real flights. Now we are entering into the next stage of development from a pure OEM provider, professional products and technologies to a platform operator setting necessary rules and standards for commercial operation systems. To achieve this goal, we still have a lot to do. Numerous safe flights have laid a solid foundation for us to start the mass production. We have just completed public trial flights for verifying and demonstrating the UAM use cases in Korea, which helped to generate new orders from the Korean market. The quality of our AAVs always remains our top priority. Since our current production facility can no longer meet the needs of the mass production, we decided to build a new production facility in Guangdong Yunfu with an area of 40,000 square meters and the planned initial annual capacity of 600 units passenger-grade AAVs. More important, we will reestablish a complete set of industry standards and systems from designing, production and operations and will devote ourselves to designing and developing infrastructure, including the automated verticals so as to gradually establish an integrated operating system. Like that existing airports, this is also an important measure to ensure the safe operations of EHang 216. Today, we have developed an integrated AAV technology platform with proprietary intellectual properties, leveraging our experiences and expertise in the fields of hardware, software and supply chains. We will release more AAV models with different payload levels to meet the demands for mid-haul and long-haul flights, thus gradually expanding the operational range of autonomous air mobility. In terms of new products, while we continue to accumulate potential orders of the EHang 216F firefighting model, we are accelerating the official certification process. Meanwhile, China's State Council has also proposed to accelerate the industrial upgrade and the practical applications of firefighting unmanned aerial vehicles. The EHang 216 AAVs, including the passenger version, the firefighting version and the logistics version are expected to be key revenue drivers in the years to come. In respect of policies and regulations, we are trying to push forward the process. In China, we received an approval from the Civil Aviation Administration of China for airworthiness certification pilot and trial operation programs as early as 2018. Recently, the CAAC announced 13 selected cities as a civil unmanned aviation experimental zones. Just recently in last week, China State Council also are urged to include UAM development into the national strategies. With the government support and a relevant infrastructure upgrade, we will receive airworthiness certificate for EHang 216 in 2021 and begin to provide commercial operation services. The commercialization of UAM will definitely be realized sooner than expected. So let's embrace a future together. Next, our Chief Strategy Officer, Edward Xu, will provide the operational and business updates. Thank you. Well, those were Mr. Hu's remarks. Now let me cover some of our business achievements in the quarter of this year. As Mr. Hu just mentioned, we delivered a strong quarter with impressive business progress and solid financial results. The sales of our flagship passenger-grade AAV, EHang 216, reached 23 units; 2 were the newly launched EHang 216F, a firefighting version of EHang 216. This version is especially designed AAV for aerial firefighting solution, especially for high-rise buildings. In a recent circular published by the China State Council, it stressed the need of innovation for emergency response to fires with application of UAV technologies. So we believe the launch of the EHang 216F was the right time to meet the potential market demand. With an operational altitude of up to 600 meters, the EHang 216F is superior to conventional extinguisher equipment for high-rise fires. Given the large payload, EHang 216F is the world's first AAV for aerial firefighting. It can carry 150 liters of extinguishing foams and 6 fire projectiles in a single trip. Our cluster management techniques allow us to operate the AAV in the fleet through the remote ground control stations. So far, we see significant market demand and strong interest from China's emergency management departments and fire departments at all levels. In September, we launched another new product, EHang 216L, an aerial logistics version of the 2 EHang 216. This is a multi-rotor AAV with a record payload for short- to medium-haul air logistics in both urban and rural areas. This model opened up more commercial opportunities for various urban and rural aerial logistics uses that require frequent and point-to-point deliveries, including large parcel deliveries, the agricultural product transportation, offshore transportation, aerial emergency response and disaster relief, et cetera. As a world-leading AAV company, we are committed to explore new products and solutions to meet the high demand for AAVs to solve problems and to empower our smart cities in China and overseas. Moving forward, we have a robust new product pipeline and will continue to develop more use cases to further accelerate the commercialization of AAV technologies and air mobility solutions. Moving to our business expansion. We announced in July to set up a new production line in Guangdong Yunfu to meet the increasing market demand for AAVs. This will complement to our existing facilities in Guangzhou. With local government support, the Yunfu factory is expected to start production in the first half of 2021, with an initial capacity of 600 units per annum, especially for EHang 216F. The Yunfu factory will feature an R&D facility and a training center for air mobility. We are excited about this new project, which is expected to bolster our capability to meet increasing demand for AAVs in China. In this quarter, we also made several meaningful regulatory breakthroughs. In July, EHang 216 was awarded a Special Flight Operations Certificate by the Transport Canada Civil Aviation, with which trial flights of the EHang 216 have been permitted and are routinely conducted in Québec province, Canada. This was the first of this kind permit for periodic operations of passenger-grade AAVs in North America, which marked an important milestone in regulatory breakthroughs for EHang 216 in international markets. Furthermore, in August, we were selected to join Ambular, an international project supported by the International Civil Aviation Organization, ICAO, which is developing a flying ambulance for emergency medical uses. As a first company in the world to launch and commercialize passenger-grade AAVs, we will contribute the necessary hardware such as rotors and motors to the Ambular project. We are excited to join ICAO-supported Ambular project, where we can work with industry leaders to fulfill the mission of saving critical minutes in emergencies by leveraging our unique technologies and practical experiences. Most recently, we continue to obtain a service of significant favorable policies and regulatory breakthroughs, paving the way for our air mobility operations in China and globally. For example, in October, the Civil Aviation Administration of China, or CAAC, approved 13 cities including Beijing, Shanghai, Hezhou, et cetera, to be the unmanned civil aviation experimental zones to accelerate the growth of the UAM industry for various use cases. We are an important force behind this initiative and supported several cities to obtain the approvals. In late November, the General Office of the State Council of the PRC issued a circular, which urges to bring UAM development into China's national strategies and formulate relevant policies, standards and legislations. The potential applications of firefighting UAVs were also emphasized by the State Council. He reflects China government's great emphasis and strategic support for the new UAM industry and should lay a solid regulatory foundation for the industry. We think this will pave the way for China to become the world's largest UAM industry market and for us to strengthen our leadership and growth momentum. Notably, our progress in overseas market is equally important. In Asia, we obtained a special certificate of airworthiness or SAC for the EHang 216 from Korea Ministry of Land, Infrastructure and Transportation in November, a first SAC ever issued to a passenger-grade AAV in Korea. Furthermore, we have successfully conducted the maiden flight in the center of Seoul, Daegu and Jeju Island for different use cases, including emergency medical service and aerial sightseeing. This is a significant milestone marked our starting point to explore the UAM market in Korea. Moving forward, we will further expand the UAM pilot city network and achieve regulatory breakthroughs in more countries and global organizations, paving the way for global expansion after the virus is contained. To conclude, we continue to deliver solid performance in this quarter. We are optimistic about our long-term outlook of the UAM industry, and we believe our first-mover advantage will enable us to drive robust growth in the near future. Now I will turn it over to our CFO, Mr. Richard Liu, to provide the financial details for this quarter. Richard, please go ahead. Thank you.

Thank you, Edward, and hello to everyone on the call. Before I go into details about our financial results, please note that all numbers presented are in RMB and percentage changes refer to year-over-year comparisons, unless otherwise specified. Detailed analysis is contained in our earnings press release, which is available on our IR website. I'm going to highlight some of the key points here. We achieved the highest quarterly revenue and gross profit in the company's history this quarter. Total revenues were CNY71 million, up 104.3% year-over-year, with growth across the main revenue streams. Our core business of air mobility solutions represented 49% of the total revenues. Sales of the EHang 216, the company's flagship passenger-grade AAV, reached 23 units, including 2 units of the firefighting version, the EHang 216F, compared with 18 units in Q3 last year. Gross profit was CNY42 million, up 120.3%. Gross margin reached as high as 59.2%, up 4.3 percentage points from 54.9% in Q3 last year. This was mainly driven by the optimization of cost structure of certain products and changes in revenue mix. This reflects our competitive value resulting from our leadership and first-mover advantage in the industry. Adjusted operating expenses, excluding share-based compensation, increased by 41.2% to CNY37.9 million. As a percentage of total revenues, it was 53.4% as compared to 77.3% in Q3 2019. The increases were mainly due to higher R&D expenses related to the continuously strengthened product development efforts and additional G&A expenses related to public company operations, and prudent provisions in light of COVID-19 evolvement. As revenues continue to ramp up, there is operating leverage that supports our path towards operating profitability. Along this line, we have again achieved the quarterly adjusted operating profitability this quarter, following Q4 last year. Adjusted operating profit was CNY4.5 million compared with adjusted operating loss of CNY7.4 million in Q3 2019. Adjusted operating margin was 6.4% compared to negative 21.2% in Q3 last year. We further achieved CNY5.3 million adjusted net income with a net margin of 7.4% compared with adjusted net loss of CNY7 million in the same period last year. Looking at our balance sheet and cash flow. We ended the quarter with roughly CNY243 million in cash, cash equivalent and short-term investments. Overall, the financial results in Q3 were solid with record-high quarterly revenues and gross profit. And we will achieve the second quarterly adjusted operating profit and net income despite the continuous impact from the COVID-19 pandemic. Now let's turn to the outlook. Due to continuous uncertainties surrounding the impact and duration of the COVID-19 pandemic in China and international markets, we are adjusting our outlook for 2020 to at least a 50% growth in annual revenues. Having said that, we have become more optimistic and confident in our long-term growth outlook, given the increase in practical usage and demand for AAVs and a stronger government emphasis on supporting the industry growth in the global UAM markets, especially in China. With that, we conclude our prepared remarks for today. Let's now open the call for questions. Operator, please go ahead.

[Operator Instructions]. First question comes from the line of Tim Hsiao of Morgan Stanley.

Basically I have three quick questions. The first one, could you share what about the progress in all the government projects you have won in terms of percentage or kind of order contribution is now coming from the government? And do we need to wait till the airworthiness certificate I think when you can get that to next year before the mass production for the government? My second question is about our current revenue or business model, because we noticed that the third quarter revenue significantly outgrow the volume growth for the EHang AAV. So just wondering if there's any change to our business model. Were it client mix or the business mix? And my last question is about the outlook. I know it might still be early, but could you please comment a little bit on the 2021 outlook for next year and probably specify what would be the key drivers for the growth here?

Thank you, Tim. This is Edward. I'll take your first question. So regarding the progress of the government project, right? So basically, we secured the partnership, the two city governments in Spain. One is Seville, the other is Llíria. And so far, we -- the two projects have gone so far, so good. We have started the test flights and pushing forward the regulatory process for EHang 216 in Spain for the further certification. And also another project is in China, in -- it's a smart city management project in Hezhou. We are providing the command control center for the government. And so far, the project is going well. Thank you.

So question answered by Mr. Hu. Let me just translate what Mr. Hu said. In the third quarter, actually, we are experiencing change in our business model or we are adding new market because previously, we have been working as an OEM provider. We are selling our equipment. But we realized that to -- we are going to be operating our system and equipment. So that means, given a lot of this flight data accumulated so far, we are able to provide the real operation by ourselves to our customers. This is just like 100 years ago when Boeing and Airbus are providing the new -- the whole new air transportation to the society. And however, it's different that we are not providing this to the pilots. We are providing the service to every normal person without any flying techniques. So that means we are going to lead, take the lead for -- to launch the operation model. Thank you. Okay. Given the -- our performance in the past few quarters, and we are realizing that the standards and operation framework is very, very important. And so we need to formulate the process and the standards for operations. And actually, we -- our customers have received our AAVs, and they are trying to launch the operation. But as a platform operator, we need to set the standard for them. And so we are also working closely with CAAC in setting the right standards. And so we believe that safety always remains our top priority. And so we need to get the standards right and so as to provide safe service to the normal person. The third question? I think Richard.

This is Richard Liu. Tim, I will take your third question. I understand your third question was regarding any prospects for the next year. Frankly speaking, as referring to our latest press release, quoting the latest circular issued by the State Council, we are currently assessing the situation. But definitely, this circular will stimulate the future demand and which will lead to more orders in the future. Thank you.

Next question is from the line of Vincent Yu of Needham & Company.

I have three questions. The first one is about the government's support in the regulation. So with regards to the circular released by the State Council of PRC, have we seen any progress made in the regulatory front in terms of like state subsidy or incentive for manufacturers? My second question is about the margin trends post COVID with the new firefighting products line as we have already start selling this product. And my third question is actually about the guidance. We -- actually, we -- in the beginning of the year, we said we will -- the guidance is at least 200%. So obviously, due to the COVID, we see in this earnings, we said that we are going to make a lower rate to 50%. Still a pretty high number, but a big difference compared with the number we previously set. So wondering for -- like is that just order got delayed, we were going to have it, like receive it in the next year because in terms of international, did we or any other reason?

Okay. So for your first question, maybe I'll explain. So it is very clear that we see more and more positive attitudes or messages sent by the government, including the CAAC and the State Council. For example, CAAC recently selected 13 cities to be the experimental city for unmanned aviation zones in China. And specifically, EHang, we had a connection with at least 3 of them. And this would give us a good opportunity to certify our EHang 216. And also, this can expedite our process of certification. And more importantly, just in last week, we had the State Council's circular, which stressed 3 points. One is that it is specifically mentioned that UAM development is going to be a national strategy in China. Understand that the government feel the urge, because Korea and Japan, both countries have elevated this UAM developed into their national strategy. And so China, the government, it's very good to hear that government realized this problem. And also, they see the potential for this industry. So after including UAM into the national strategy, this will be a very important critical factor for the development of the whole industry. And understand that we are the industry leader, and so we should be the key beneficiary of this policy change. And secondly, they specifically mentioned that it urged the acceleration of the legislation for the UAV in China, given the faster development of the industry. And so we understand that improved legislative framework will do more good for the industry. And the third, it specifically mentioned that for the firefighting and emergency service in China, we need to adopt the technology of the UAV. And just in the right time, we launched the firefighting version of EHang 216, so which can just meet the demand for such a product. And so 3 of the points of the State Council's circular are very positive message for EHang. Thank you.

This is Richard Liu. I'm going to take your second question. So in respect of our gross margin, we have seen our gross margin maintained at a stable high level of around 50% plus since we started the commercial delivery in the first half of last year. If you look at other electrical transportation technology products such as electrical cars, our gross margin is much higher. So in respect of the -- our new model, firefighting model, the gross margin is expected to be in line with that of the other existing models. And overall, it is expected, our gross margin will be maintained at the similar level of 50% plus going forward. And your third question on -- so basically, we just did the 2020 annual revenue guidance, mainly because the extended impact of the COVID-19 pandemic caused delays in our business development, mainly including: first, as our CEO, Mr. Hu mentioned, comprehensive infrastructure is needed for operation service; and some of our customers have been developing the infrastructure, including the VertiPod. The original plan was to complete the infrastructure in Q4. But due to the extended impact of COVID, the development of the infrastructure has been delayed, resulting in postponed customer pickup of our products into next year. And second, we released the firefighting model at the end of July. After that, we had attracted strong interest from emergency management departments and firefighting equipment customers. Actually, there is increasing number of potential orders in discussion. However, because this is type of special requirement, it requires special equipment certification before official sales can be effective. We have been trying to accelerate the certification process after the release in July in order to make up for the time loss due to the virus outbreak and aim to get it before the year-end. As the COVID outbreak resurged, now it is expected, the certification would be completed around next Q2. So the sales plan of this firefighting model in 2020 has to be postponed to next year. And third, at the beginning of the year, it was planned for the European markets to generate important business leads and revenues. For this goal, we not only form a local operating team, but also obtain the flight permits, that's the one in Norway, and established partnership with 2 Spanish cities. But the severe pandemic situation in Europe hindered our business execution. Although in Q3, we had tried our best to speed up the execution to make up for the time lost, the rebounded -- as all of you know, the rebounded pandemic in Europe hindered us again. So to sum up, based on the latest valuation, we adjust the guidance for prudent purpose. Having said that, it is expected to be a temporary situation. As our CEO point out, based on our new development, especially the latest breakthroughs of the Chinese government's policies and strategies, we are more confident in the company's sustained long-term fast growth prospects. Hope this answer your question. Thank you.

Next question is from the line of Arvind Monie of Wellington Management.

So maybe going back to a few questions before and just to try and understand your business model better. Can you kind of give us a sense of how you move from being an OEM to being kind of following a command control center model? And how that is impacting your kind of receivables. So if I do look at your outstanding receivables at the end of the quarter, it's quite a substantial increase from the corresponding period. So I just want to understand how your business model is evolving. What are your credit terms? I think the last time we spoke, you kind of managed the command control center for maybe like 6 months and then transfer kind of either authority or know-how to the local government and then things take over from there. So can you just kind of explain and give us a background of how your business model is evolving over time?

Okay. Let me translate this to Mr. Hu, and he will take the question. Okay. I will translate the first. So first, we are not saying that we are going to change our business model. We just added new business to our existing platform. For example, previously, we were OEM provider. We didn't manage to operate the AAVs up by ourselves. But we understand that we -- now, we are going to operate the AAVs or platforms by ourselves. It seems that we are changing from a pure airline manufacturing company into airline operating company. So the 2 business models are integrated. And second, we realized that the value for EHang is that we are providing the individual a customized transportation mobility services to each individuals. For example, during the COVID-19, in many countries, the public transportation has been suspended due to the outbreak of the virus. But the individual mobility transportation becomes important. So EHang is providing the mobility service to individual by these AAVs. So this definitely shows the value of our company, of our products. So far, we have built five command control centers in China. And meanwhile, we are building a new one in Europe, in Azerbaijan specifically. So given these command control centers, we are able to manage the operation of all our AAVs very well, very smoothly. So all these command control centers actually help to improve the management of all our AAVs, not only into EHang 216 but the other AAVs to be applied in different use cases, such as the highway inspection, the environmental protection, et cetera, and to help realize the smart city management function. So we are going to build more command control centers, not only in China but maybe in Japan, in Korea in future. So all these command control centers formed a good integrated network so that we are able to manage the operation of our AAV as well. And specifically in China, we are completing our infrastructure, including the landing path and the VertiPods, et cetera. So with more of such infrastructure being built, we are going to build a more complete network and so that the individual customers or passengers can use our service more conveniently. So in the future, we are going to see more and more of our command control centers being built in different cities. And so this will not only improve the operation of our EHang 216 passenger AAV, but also can help to improve the smart city management for the local government and which may generate more revenues for us. So actually, if you look at our business model and with the revenue mix, so there is nothing to be reduced from our previous structure. We didn't cut any of our existing services, but we are going to add this self-operation service. Okay. That's all Mr. Hu's answer.

Edward, if I don't mind, a follow-up just on this one. So can you sort of, in an ideal situation, let's say, for example, when you're working with the Hezhou government, let's say you build the infrastructure, you manage the command control center for 6 months, when does receivables start flowing in? Is it after handing over? What is the usual sort of business terms? That's one. And the other one is more kind of a question on smart city. There are other companies in China. I recently spoke to a company called RocKontrol. And they are doing basically video-based IoT AI sort of integration with smart cities, where for example, traffic management is managed by stationary cameras, for example. But they're also talking about a control center based on kind of fixed camera placements across various key parts of the city. So how do kind of local governments think about these multiple solutions as they go from mobile solution like yours? Are you talking to companies like this to kind of come up with a better and more integrated solution? If you can kind of give us an insight on how this is playing out with the government, that will be great to know.

Okay. Thank you. And let me translate the question first. Okay. Mr. Hu will answer you first.

So regarding specifically our project in Hezhou. For building this command control center, we will get a one-off fee or revenue from the government for building this command control center. And the second, we're going to charge the service fees for operating this command control center for the government. And so basically, there are two portions of the revenues. First is a fixed amount of revenues for regular services. And the second, we are going to add more services to more specific or special use cases and to generate additional revenues from that. And additionally, the government may consider purchasing more AAVs from us, not only the EHang 216 passenger AAV, but some industrial application AAVs. For example, the 3D mapping will be one of the functions the government will need. And so meanwhile, we are also going to provide the training services for the government, which may generate additional revenues. So first, we see there are big differences between our UAV smart city management model and the other static camera model. For example, one of the application scenario is that for our command control center in Shaoguan and Hezhou, a major function is for this firefighting or forest firefighting prevention. And so normally, you cannot rely on static camera to detect the forest fires. And so -- but our UAVs, our AAVs, can fly for the patrol and inspection and the detection of fires. And whilst the fire has been detected, we have then to send our firefighting version AAV to put out the fires. So this is something that's not possible by the normal smart city management systems. So this is our unique application.

Thank you. And seeing no more questions in the queue, I will turn the call back to Mr. Liu for closing remarks. Mr. Liu, back to you.

Thank you, operator, and thank you all for participating on today's call and for all your support. We appreciate your interest and look forward to reporting to you again next quarter on our progress.

Thank you all again, and this concludes the call. You may now disconnect.