Hello, ladies and gentlemen. Thank you for standing by for Li Auto's Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. Today's conference call is being recorded. I will now turn the call over to your host, Janet Chang, Investor Relations Director of Li Auto. Please go ahead, Janet.

Thank you, Sarah. Good evening, and good morning, everyone. Welcome to Li Auto's second quarter 2023 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 have our Chairman and CEO, Mr. Xian Li, and our CFO, Mr. Johnny Tie Li, begin with prepared remarks. Our President, Mr. Donghui Ma and other senior management will join for the Q&A discussion. Before I 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 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 filings with the U.S. Securities and Exchange Commission and the Hong Kong Stock Exchange. The company does not assume any obligation to update any forward-looking statements, except as required under applicable law. Please also note that Li Auto's earnings press release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. Please refer to Lu Auto's disclosure documents on the IR section of our website, which contain a reconciliation of the unaudited non-GAAP measures to comparable GAAP measures. Our CEO will start his remarks in Chinese. There will be English translation after he finished all his remarks. With that, I will now turn the call over to our CEO, Mr. Xiang Li. Please go ahead.

[Foreign Language] [Interpreted] In the second quarter of 2023, we reached multiple milestones in deliveries. We delivered over 30,000 vehicles in June, taking our second quarter deliveries to 86,533 vehicles, tripling the volume from the same period of last year. We delivered more vehicles in the first half of this year than all of 2022. Furthermore, in early July, we delivered our 400,000th Li Auto vehicle, taking just 42 months to reach this important milestone since we commenced deliveries in December 2019, setting a record for Chinese emerging NEV OEMs. Going from 300,000 cumulative deliveries to 400,000 took less than four months. Finally, our July deliveries hit a new high of 34,134 units, bringing our total cumulative vehicle deliveries over 430,000. With our strong product line of comprehensive improvements, organizational processes and operating capabilities, our three models continue to lead in their respective market segments, with cumulative deliveries exceeding 200,000 units since their successive launches starting in June last year. According to the insurance registration data of China Automotive Technology and Research Center, in this past quarter, Li L7 consistently topped China's large SUV monthly sales chart. The L8 also remained customer's favorite six seater SUV priced over RMB300,000. The L9 continued to dominate the full size SUV sales chart in China. Li Auto has the highest sales among domestic premium automotive brands in China, and we remain one of the top three NEV brands priced over RMB200,000 in China, with market share increasing from approximately 11% in the first quarter to about 14% in the second quarter. Driven by our delivery growth and stronger operational capabilities, our financial performance continued to improve. In the second quarter, the company achieved record breaking results across revenue, net income and free cash flow. During the quarter, our revenue reached RMB28.65 billion, up…

Thank you, Li Xiang. Hello, everyone. I will now walk you through some of our 2023 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 of 2023 were RMB28.65 billion, or US$3.95 billion, increasing 228.1% year-over-year and 52.5% quarter-over-quarter. This included RMB27.97 billion, or US$3.86 billion, from vehicle sales, which was up 229.7% year-over-year and 22.6% quarter-over-quarter. The year-over-year increase was mainly due to the increased vehicle deliveries. The quarter-over-quarter increase was mainly due to the increase in vehicle deliveries, partially offset by the lower average selling price as a result of different product mix between the two quarters. Revenues from other sales and services were RMB680.8 million, or US$93.9 million, in the second quarter of 2023, growing 173.4% year-over-year and 48.1% quarter-over-quarter. The increase was mainly due to the increase of sales of accessories and provision of services in line with higher accumulated vehicle sales, as well as increased sales of charging stores in line with higher vehicle deliveries. Cost of sales in the second quarter of this year was RMB22.42 billion, or US$3.09 billion, up 227.1% year-over-year and 49.9% quarter-over-quarter. Gross profit in the second quarter of this year was RMB6.24 billion, or US$859.9 million, growing 232% and 62.8% compared with the second quarter of 2022 and the first quarter of this year. Vehicle margin in the second quarter of 2023 was 21% compared with 21.2% in the second quarter of last year and 19.8% in the first quarter of 2023. Excluding the impact of the Li ONE, the vehicle margin of the Li series -- Li L series remained stable over the first quarter of 2023. Gross margin in the second quarter of 2023…

Thank you. [Operator Instructions] Our first question comes from Tim Hsiao with Morgan Stanley. Please go ahead.

[Foreign Language] So, my first question is about vehicle delivery, because Li Auto's third quarter volume guidance of around 100,000 implies the vehicle supply constraint, [where it] (ph) persisted throughout the whole quarter. So, could you please elaborate a bit more about the key bottleneck to your production? Is that due to supply constraints of any specific components or anything else? And how confident are you in the company's ability to remove the bottleneck and deliver like around 40,000 units per month in fourth quarter? And in meantime, should we be concerned about the similar challenge might relapse when launching the BEV models on the new platform and at the new [plant] (ph)? That's my first question. Thank you.

[Foreign Language] [Interpreted] First of all, I'll take the question on production capacity. We currently operate two production lines in Changzhou for L8 and L9 and L7. The total capacity of running the two shifts is around 50,000 units per month. The current bottleneck is still with component supply, mostly because a very strong demand for this year which led us to increase our target compared to what we said at the beginning of the year. To cope with the additional demand, we actually have a production expansion plan made in Q2, but it's taken some time for us to test the production lines and verify those. So, the new capacity will be released in due time. We are still confident that on an annual basis, we will be able to reach our delivery targets. In addition to prepare for our growth in '24 and '25, we have started early to make production and capacity plans to satisfy the needs for those two years.

[Foreign Language] So, my second question is about organization restructure, because we noticed that over the past 12 months quite a lot of BEV industry peers have come through organization restructure or had management reshuffle. We recall that Li Auto also announced organization upgrade last December to prepare for its future growth. So, could you share with us the latest progress of the restructuring efforts? And should we expect any changes to the management team in the next six to 12 months in such upgrade? And in the meantime, operational and financial metrics, could we monitor more closely to quantify the improvement, for example, the lower cost, higher margin, or a faster model upgrade, in upcoming quarters? So, that's my second question. Thank you.

[Technical Difficulty]

Our next question comes from Bin Wang with Credit Suisse. Please go ahead.

Operator, can you hear us? Sorry, we have some technical problems.

Yes, you're coming through.

[Foreign Language] [Interpreted] To translate the previous question -- answer the previous question, on the matrix organization upgrade, it's something we have invested a significant amount of resources and manpower. Our business team at the beginning of the year had set a annual delivery target of 360,000 units, but considering two factors, we had in fact earlier this year downgraded the target to 300,000 units. One is the overall economic environment, and the other is considering many of the enterprises while they're carrying out organization upgrades, their growth, in fact, had stagnated for two to three years. However, in hindsight, the actual results from the first half of this year, we -- our operating efficiency has not only not declined, but actually -- we actually saw a very significant increase. We have beaten our target every single month and the overall coordination and cooperation efficiency is very high. The benefits from a organizational upgrade have significantly exceeded our expectations. The organizational upgrade has really allowed us to find a trench wars as a army group in the smart electric vehicle industry, which is known for having very long product cycles and long value chains. Once we have achieved certain milestones in terms of market share, we are able to defend it very steadily and continue to build on top of it. So, we can see, as a result, we have displayed a very steady growth curve over this first half, but also the second half of this year. And that is the real benefit of our organizational upgrade. In terms of the matrix organization, there are really three types of specific benefits. First of all, from our -- well, we describe ourselves as a gorilla in our early days to being actual formal armed forces. The company is really building…

Our next question comes from Bin Wang with Credit Suisse. Please go ahead.

[Foreign Language] I got two questions. Number one, about the margin. What's your outlook in the third quarter and the fourth quarter this year? Because previously you've highlighted the Li ONE has been checked out about 2% gross margin. Now you have a better volume in the second half of this year. Can we assume the second half margin will be above 23%, increased by 2 percentage? That's the number one question about the margin. And secondly about self-driving technology. Right now, you're doing the early bird program for some customers. Right now, when will self-driving can move out to every single car buyer when they purchase a car they can enjoy? So, do you have a timetable to share for 2024? Thank you.

Hi, Wang Bin. This is Johnny from the company. Our second quarter gross margin reflect our sales and marketing teams' effort. So you can see the improved SG&A percentage as the total revenue. And also some positive improvement on the [indiscernible] from our supply chain team. And we will continue to improve on that, but for the whole year because we still got six months -- five months to the end, so we still want to keep the whole year gross margin guidance just above 20%. Yes. Thank you.

[Foreign Language] [Interpreted] On the city NOA and commute NOA, we will continue our original plan to roll them out in batches in different cities. And the rollout plan is going to be largely based on the number of vehicles or owners in the specific cities. The more owners, the more mileage is [regulated] (ph), more test data, the more likely the cities will get city NOA and community NOA early. In addition to that, we're also taking into consideration the NPN features of complex intersections in those cities and the amount of data coverage that we have. So as more and more early bird users join into our pilot program, we'll be opening up our NOA features in more cities. Overall, the development and testing for NOA features are going on track. And in June 2023, we've offer test drive of our city NOA in Wangjing, which is known as one of the most complicated traffic zones in Beijing, using the first -- China's first NOA and city NOA solution that doesn't rely on a high-definition maps. And media gave very nice reviews about the features. In July, in Beijing and Shanghai, we've opened up city NOA to early bird users and users feel very highly of the comfort and safety of our solution. And this year, we will be releasing our city NOA and commute NOA for large scale testing. And the plan to release it in 100 cities remains unchanged. Internally, we're continuing to accelerate the R&D testing of our city NOA solution.

Thank you. Thank you so much.

Our next question comes from [indiscernible]. Please go ahead.

[Foreign Language] I have two questions. The first one is about the quarter's -- the third quarter's sales. How do we see the sales elasticity for the third quarter expectation? My second question is about Mind GPT. Could you give us more color about how Mind GPT going? Thank you.

[Foreign Language] [Interpreted] First of all, on guidance, the guidance we've given earlier today is really built around our production capacity, the maximum of our production boundaries for Q3. For Q4, with increased production capacity, we'll be able to reach or surpass the 40,000 per month mark. And another important point to note is we're very confident that we will be able to challenge the leadership position of Mercedes, BMW and Audi in China, meaning that we'll exceed their sales in China and become the top selling luxury brand in China. Second question on Mind GPT, in terms of technology, we released our internal big model Mind GPT. And we have built -- since built a full stack in-house development capability of large language models. And the R&D really falls into four areas: first is data; and second is, big model training algorithms; and third is assessment and security; and lastly, application deliveries. On the training algorithm front, we've stated in line with mainstream algorithms in the industry, including the foundational model training, which utilizes 1.3 billion tokens, and to command, fine tuning and reinforce learning. And in order to make sure that the Mind GPT model can have accurate knowledge and be able to personalize based on the users, we've also introduced search and recommendation algorithms, which are also built in-house. Mind GPT is now in version one, which uses 16 billion parameters, and based on the foundation model, we can better suit the user scenarios of our users and to make Li Xiang Tong Xue more interactive with our users. On the product front, the big model based Mind GPT is really going to -- is going to power our first-generation multimodal human machine interface operating system. And it can allow every single person of our user family to use AI with ease and make Li Xiang Tong Xue a new member of the family and can be an expert on the car and can be a teacher and can be a tour guide, it can be everything. And in terms of progress, we'll be sharing more details about the progress of R&D. And so far, we have already opened up Mind GPT for internal [indiscernible]. And after these tests, we'll be releasing the models to a small number of early bird users through [indiscernible].

Our next question comes from Paul Gong with UBS. Please go ahead.

[Foreign Language] So my first question is regarding the MEGA, regarding its capacity preparation as well as sales expectation. Does the Zeekr 009 the only purely electric MPV currently in the market provides benchmark? And after MEGA, what is our latest thoughts on the product pipeline for the BEV?

[Foreign Language] [Interpreted] First on MEGA sales target, we're confident that MEGA will become the top seller in the market above RMB500,000 across all the different energy forms and body types, just like we've seen from L7 and L8, which are respected market leaders in their segments. They've also won over market share from sedans and other segments.

[Foreign Language]

[Foreign Language] [Interpreted] Next year, we're planning to release four vehicles, one range extender vehicle and three pure electric vehicles, not including MEGA, which we just talked about. For specific product details, we'll be sharing on our product release next year when the time is appropriate.

[Foreign Language] So the second question is regarding the parallel exports. We realize that there are some informal trading of the Li Auto's products into other countries. How big is this in terms of scale? And do you have any plan to formalize it from gorilla into formal army and expand our sales volume as well as our global influence of the branding?

Hi, Paul. This is Johnny. I think we want to state again, we want to I think globalization after we become dominant in China, because China is a very big market, as we just mentioned. So, the answer is no, we want to -- and also our product was designed and was available for sale only for China [Mainland] (ph). That's all. Thank you.

Okay. Thank you very much. Thank you.

Our next question comes from Jing Chang with CICC. Please go ahead.

[Foreign Language] A follow-up question about gross margin. As Mr. Li Tie just mentioned, some [indiscernible] factors on our gross profit margin in the second half of the year, we still maintain the guidance of 20% for the full year guidance. So, is there any potential negative impact we can see and what might that be? Also into plan '24, our BEV model in the factory we'll start to put into operation. So because we can see the current BEV models relatively have a very low gross profit margin, so how can we achieve our BEV model to drive higher gross profit margins compared to the industry?

I'll take this question. This is Johnny. And as I just mentioned in the early question, the current gross margin has reflected our effort of -- from our supply chain team. And we keep improving on the [indiscernible] and to help us to improve our gross margin to the 25% desired gross margin continuously. And for the BEV, we think every time we launch a new product, we will welcome some questions about the margin, and because there are some product offerings in the market, we still want to reinforce our statement that the product gross margin was from the first day, you define a customer and you define your product goal. So, we -- what we want to say is that we -- overall, we want to keep 35% for the whole company with different product offerings. Yeah. Thank you.

[Foreign Language] My second question is about autonomous driving. So, we plan to release city NOP -- NOA plus -- NOA function to 100 cities by the end of this year, which is very aggressive target. Is there any challenge as we can see at present? So, can you share more about our outstanding capabilities in different aspects of our autonomous driving to support us in achieving such a challenging target?

[Foreign Language] [Interpreted] As we mentioned earlier, we're still planning to release city NOA and commute NOA batches as opposed to releasing all the cities in one go. And we're on track to delivering city NOA to 100 cities by the end of this year. In terms of technical capabilities, we think we have advantages in both perception and planning. On the perception side, we have this innovative newer prior network and also traffic end-to-end network to predict traffic lights intentions using this end-to-end model. All of this going to enhance our BEV model, which can perceive or sense the complex road structure information in real-time and understand traffic rules. And also using occupancy network, we're able to recognize general obstacles on the driver's front. On the planning side, we're using -- utilizing imitation learning algorithms, which learns from a lot of human driver behavior and decisions to make sure city NOA can stay safe on track and also follow traffic rules, and, at the same time, drive very similar to human behavior. We have, the biggest autopilot or NOA training testing fleet in China, and also have the most training mileage as well as a significant reserve of cloud -- computing power, which we believe will be our absolute competitive advantage.

Your next question comes from Ming Hsun Lee with Bank of America. Please go ahead.

[Foreign Language] So, my first question is regarding your sales channel. So right now you have more than 330 retail stores that cover more than 120 cities. So, in terms of your long-term goal, how many stores and how many cities do you want to cover? Besides that, could you also share what is the successful part of your sales channel management? And also in what area do we want to improve if there's any?

[Foreign Language] [Interpreted] On stores, we have a firm belief that good products and good channel work in tandem. We can't live without either of them. A metric we use internally is for a store which has been operating for six months, we think getting over 100 orders per month is a pretty healthy level of operating efficiency. But with that said, we'll still focus on not only short-term sales per store, but also long term, we'll be looking into investing in new store and expanding our sales network. By 2025, we'll be -- by then have many models and much greater sales than today. So, we will -- are still committed to opening more stores and covering more cities, covering more users. And we really think there's not much secret sauce in terms of where to open stores and how the stores would look like. Because in Mercedes, BMW and Audi has -- all of them have verified a very successful model in terms of user coverage and city coverage. So, we don't really need to reinvent wheels here. Our plan is really in the next few years to continue to expand to lower-tier cities and cover more users just following their footsteps, so that we could support our sales healthy by 2025.

[Foreign Language] So my second question is regarding your charging network. So, do you have any plan regarding your expansion target? What's your potential CapEx? Will you build charging station by yourself or mainly let the third-party to build and operate? Will all of those charging stations be 5C grade or some will be lower grade?

[Foreign Language] [Interpreted] We're still on track to rolling out 300 supercharging stations by the end of this year. And in 2023, our charging stations, by the end of this year, will cover mainly the four economic zones, which includes the Tianjin-Beijing- Hebei area, the River Delta area, and the Guangdong Bay Area, as well as the Chengdu-Chongqing area. And by 2025, we will be have built 3,000 HPC charging stations, which will cover over 90% of all of the highway mileage, as well as the major cities in China. We will make sure to finish -- achieve that goal, of course, with operating efficiency as well as a healthy free cash flow in mind. And so far, we believe the financial burden is totally manageable. All of our highway HPC stations will be built and operated in-house. And all the city stations will be working with the franchise models, so that to accelerate the expansion of charging stations.

The next question will come from Yuqian Ding with HSBC. Please go ahead.

[Foreign Language] I've got two questions. The first is on the OPEC management. The company's old OPEC management has been quite good, especially in the first half, the R&D run rate is roughly 30%, 40% of the full year guidance. So, can we structurally revising down the guidance on R&D and SG&A or that would suggest in the second half when we roll out NOA in 100 cities that would require more intensity in terms of R&D and SG&A? And the second question is about breaking out into our current dominating zone. We're currently quite dominant in the big size, the family utility SUV at the pricing category above RMB300,000. But in the future, we'll probably have more to launch in a pricing category between RMB200,000 to RMB300,000. Currently, we're seeing a very intense competition and many new models supply over there. So, how do we potentially differentiate over there and maximize the volume impact that we're currently seeing in our dominating zone?

Hi. I will take the R&D question first. We will continue to invest in the R&D for autonomous driving -- either for autonomous driving or other areas of the BEV, if necessary. We still want to keep our full year R&D expenses above RMB10 billion. Thank you.

[Foreign Language] [Interpreted] We're very confident on the overall product leadership of Li L6. We believe that L6 will become the best-selling product across the L lineup. We will continue to invest in competitiveness and we believe it will be the product of choice in the price range for family users.

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.

Thank you once again for joining us today. If you have any further questions, please feel free to contact Li Auto's Investor Relations team. You may disconnect your lines. Thank you.