Hello, gentlemen. Thank you for standing by for Li Auto's third quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. Today's conference call is being recorded. I will now turn the call over to your host, Janet Zhang, Director of Investor Relations, Li Auto. Please go ahead, Janet.
Thank you, Rachel. Good evening, and good morning, everyone. Welcome to Li Auto's third quarter 2021 earnings conference call. The company's financial and operating results were published in the press release earlier today and were posted on the company's IR website and the Hong Kong Stock Exchange. On today's call, we have our president, Mr. Kevin Yanan Shen, our CFO, Mr. Johnny Tie Li, to begin with prepared remarks. Our founder and CEO, Mr. Xiang Li, and our CTO, Mr. Kai Wang, will join for the Q&A discussion. Before we continue, please be reminded that today's discussion will contain forward-looking statements made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's actual results may be materially different from the views expressed today.
Further information regarding risks and uncertainties is included in certain filings of the company with the U.S. Securities and Exchange Commission and announcements published on the websites of the Hong Kong Stock Exchange and the company. 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 Li Auto's press release and interim and announcements which contain a reconciliation of unaudited non-GAAP measures to comparable GAAP measures. With that, I will now turn the call over to our president. Please go ahead, Kevin.
Thank you, Janet. Hello, everyone, and thank you for joining our call today. We are excited to be part of this once-in-a-century transformation from ICE vehicle to smart electric vehicles. We are also pleased to see user acceptance of NEVs reaching an inflection point. As reported by the China Passenger Car Association, the penetration rate of NEVs in retail sales, excuse me, rose significantly to 18.5% in October from 5.8% in 2020. Looking out to 2022, we believe the extended range system with a large battery capacity will usher in a year of explosive EREV sales.
Against this backdrop and on the heels of the successful 2021 Li ONE launch in May, we delivered strong results in the third quarter, achieving revenue growth of 209.7% year-over-year, underpinned by record-breaking quarterly delivery of 25,116 units, an increase of 190% year-over-year. This growth once again highlights the underlying strength of our 2021 Li ONE and its compelling appeal to family users. Thanks to the dedicated efforts of our team and supply chain partners, as well as continuous support from Li ONE users, our October deliveries was 7,649 units, increasing 107.2% year-over-year. Our order intake remains robust, hitting a new monthly record of over 14,500 units in October.
The rapid development of the smart EV industry has magnified the effects of the industry-wide chip shortage, challenging each OEM's production and delivery schedule. While we are enjoying the strong user endorsement of our product, our delivery growth lagged our order growth due to the chip supply shortage, which has constrained our production. Despite the lingering impact of COVID-19 and extreme weather condition in certain regions, we have resolved some of the chip supply problems by working diligently with our supply partners and also internal teams. We delivered the 100,000 Li ONE to our family users in this month and expect our deliveries in November to exceed 10,000 vehicles. In light of the ongoing industry-wide semiconductor shortage, we expect the total deliveries in the fourth quarter of 2021 to be between 30,000-32,000 vehicles.
As the development of the smart electric vehicle industry accelerates, we think the challenge to the overall EV supply chain facing the industry will persist into the future. Going forward, we will continue to take actions and find multiple measures together with our supply chain partners to mitigate the risk. Turning to the profitability, our gross margin stood at 23.3% in the third quarter, up 3.5% year-over-year and 4.4% quarter-over-quarter. Our operating cash flow was RMB 2.17 billion, or $336.7 million during the third quarter, reflecting our consistent and relentless focus on execution and cost management.
During the third quarter, we made a notable progress in the expansion of our direct sales and service network, which not only serves as our user touch point for efficient sales and marketing, but also an integral component of our closed loop integrated online and offline platform that help us manage user feedback to continuously enhance our products and services. As of October 31, 2021, we had 162 retail stores covering 86 cities and 223 servicing centers and Li Auto authorized body and paint shops operating in 165 cities. We will continue to expand our coverage of lower tier cities while deepening our penetration in first and second-tier cities to reach our target of 200 retail stores by year-end, covering more than 100 cities in China.
This will increase our brand awareness and prepare us for surging user demand as we launch new models. In terms of product optimization, we upgraded the in-car voice assistant, Li Xiang Tong Xue, and launched a new application store via an OTA update in early September. The new Li Xiang Tong Xue is smarter and able to carry out smoother and more natural conversations. Li Xiang Tong Xue can also take separate commands from four different zones in the car, providing full coverage in-car voice control and creating a more fun and entertaining experience for families. The new application store offers a streamlined interactive design supporting an application ecosystem similar to that on smartphones, allowing users to upgrade their in-car applications without the need of an OTA update. With these upgrades, our Li ONE continues to evolve and grow.
Meanwhile, we plan to release our NOA upgrade to 2021 Li ONE users in December. We are confident that 2021 Li ONE with NOA functions will provide family users with safe, enhanced convenience and effective ADAS functions. Following the NOA upgrade through OTA, all 2021 Li ONE will be equipped with this feature. We are prepared to provide NOA to over 60,000 family users by year-end, gaining a dominant leadership in this regard in China. In terms of HPC BEV, we are making good progress developing our technologies to support high power charging. We have completed the 4C battery pack test on vehicles and demonstrated that it can support a driving range of more than 400 km with only 10 minutes charging.
With the proceeds raised through our dual primary listing, we will build upon our recent success and deploy R&D capital to drive parallel development in EREVs and BEVs, and advancement in smart cockpit and ADAS technologies, aiming to introduce more product catering to family users needs and competing with both ICE vehicles and the electric vehicles. We also made headway in expanding our production capacity. In October, we officially commenced the construction of our manufacturing base in Beijing. The manufacturing base is scheduled to be operational in 2023 and will serve as an important production base for our premium BEVs. Now, I will turn this call over to our CFO, Mr. Tie Li, to review our financial performance in the third quarter.
Thank you, Kevin. Hello, everyone. I will now walk you through some of our financial results for the third quarter of 2021. Due to time constraints, I will address financial highlights here and encourage you to refer to our earnings press release for further details.
Total revenue in the third quarter of 2021 were RMB 7.78 billion, or $1.21 billion, representing an increase of 209.7% from RMB 2.51 billion in the third quarter of 2020, and an increase of 54.3% from RMB 5.04 billion in the second quarter of this year. This included RMB 7.39 billion, or $1.15 billion from vehicle sales, which increased 199.7% year-over-year and 50.6% quarter-over-quarter.
The increase in revenue from vehicle sales from the third quarter of 2020 and the second quarter of 2021 was mainly attributable to the increase of vehicle delivery in the third quarter of 2021. Revenues from other sales and services were RMB 389.4 million, or $60.4 million in the third quarter, representing an increase of 745.1% year-over-year and an increase of 187% quarter-over-quarter. The increase in revenue from other sales and services over the third quarter of 2020 and the second quarter of 2021 was mainly attributable to the sales of regulatory credits as well as increased sales of charging stations, accessories, and services in line with higher accumulated vehicle sales.
Cost of sales in the third quarter of 2021 was RMB 5.96 billion, or $925.5 million, representing an increase of 196.1% year-over-year and an increase of 45.9% quarter-over-quarter. Gross profit in the third quarter of 2021 was RMB 1.81 billion or $281.2 million, growing 264.8% comparing with the third quarter of 2020 and 90.2% compared with the second quarter of this year.
Vehicle margin in the third quarter was 21.1% compared with 19.8% in the third quarter of 2020, and 18.7% in the second quarter of 2021. The increase in vehicle margin was primarily driven by higher average selling price attributable to increasing deliveries of 2021 Li ONEs in the third quarter of 2021. Gross margin in the third quarter was 23.3% compared with 19.8% in the third quarter of 2020, and 18.9% in the second quarter of this year, mainly driven by the increase in vehicle margin.
Operating expenses in the third quarter were RMB 1.91 billion or $296.4 million, representing an increase of 182.2% year-over-year, and an increase of 28.3% quarter-over-quarter. R&D expenses in the third quarter of 2021 were RMB 888.5 million or $137.9 million, representing an increase of 165.6% year-over-year and an increase of 36% quarter-over-quarter. The increase in R&D expenses over the third quarter of 2020 and the second quarter of this year was primarily attributable to increased employee compensation as a result of growing research and development staff, as well as increased costs associated with new product developments.
SG&A expenses in the third quarter were RMB 1.02 billion or $158.5 million, representing an increase of RMB 198.5 million year-over-year and an increase of 22.3% quarter-over-quarter. The increase in SG&A expenses over the third quarter of 2020 was primarily driven by increased marketing and promotion activities, as well as increased employee compensation and rental expenses associated with the expansion of the company's distribution network. The increase in SG&A expenses over the second quarter of this year was primarily driven by the increased employee compensation and rental expenses associated with the expansion of the company's distribution network.
Loss from operations in the third quarter of 2021 was RMB 797.8 million or $15.2 million. Representing a decrease of 45.7% year-over-year and the decrease of 81.8% quarter-over-quarter. Net loss in the third quarter of 2021 was RMB 21.5 million, or $3.3 million, representing a decrease of 79.9% year-over-year and a decrease of 90.9% quarter-over-quarter. Turning to our balance sheet and the cash flow. Our cash and cash equivalents, restricted cash, time deposit, and short-term investments totaled RMB 48.83 billion, or $7.58 billion as of September 30th, 2021.
Operating cash flow in the third quarter of 2021 was RMB 2.17 billion, or $336.7 million. Free cash flow was RMB 1.16 billion, or $180.8 million in the third quarter. Now for our business outlook. For the fourth quarter of 2021, the company expects the deliveries to be between 30,000 and 32,000 vehicles, representing an increase of 107.4% to 121.2% from the fourth quarter of last 2020.
The company also expects fourth quarter total revenues to be between RMB 7.41 billion and RMB 8.82 billion, or $1.16 billion and $1.37 billion, representing an increase of 112.7%-126.9% from the fourth quarter of 2020. This business outlook reflects the company's current and preliminary view on its business situation and the market condition. In particular, the ongoing industry-wide semiconductor shortage, which is subject to change. I will now turn the call over to the operator to start our Q&A session. Thank you.
Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound or hash key. For the benefit of all participants on today's call, please limit yourself to two questions, and if you have additional questions, you can re-enter the queue. If you are going to ask the question in Chinese, please follow with English translation. Once again, ask a question. It's star and the number one on your telephone keypad. Your first question comes from the line of Fei Fang of Goldman Sachs. Please ask your question.
Great. Yeah, thanks for the opportunity. Very impressive quarter. My first question is on your HPC BEV pipeline. Now, other than the 4C battery pack test that Kevin Shen has shared on the call, which is obviously very impressive, what else have you thought about in terms of the key features that differentiate your upcoming product from this competitive market? And also, can you refresh us the timeline for your next product launch? And the second question is about production hurdles. Now, management mentioned that if I heard you correctly, in October, there was 14,500 units of intake in terms of the backlog expansion. If you look at next year, when do you think the monthly production can ramp up towards that level? Thank you.
Hi, Fei Fang, can you also repeat your question in Chinese, please?
Yes, of course. [Non-English content]
Thank you, Fei Fang. This is Kevin. To your first question, for HPC, besides the 4C battery, we made a good progress. On the other hand, we also made a lot of progress on our high voltage air conditioning system. Also the progress made on the high power charging infrastructure. In terms of the timing, we still plan to. We still on track to launch our first HPC BEV product in the second half of 2023. In terms of production plan,
Actually, right now our factory already ramp up can support roughly 14,000 a month. Right now our production is gated by the chip shortage. Yeah. So basically, next year we expect our production will ramp up to more than 15,000 right after the Chinese New Year, assuming the chip shortage will be to a certain extent resolved. Yeah.
Yeah, that's very helpful color. Thank you.
Thank you.
Your next question comes from the line of Tim Hsiao from Morgan Stanley. Please ask your question.
Hi, management team. Congratulations on the great result, and thanks for taking my questions. I've got two questions. The first one about the margin, because to quote for its margin expansion certainly tracks much ahead of a previous target of high teens. Given the favorable volume scale in upcoming quarter, should we expect the upward trajectory of gross margin to persist into fourth quarter or early next year? In the meanwhile, will Li Auto consider leveraging more aggressive promotion to further boost the scale on the back of a better gross margin? [Non-English content]
Hi, Tim. This is Johnny. I think the current gross margin is as we guided before. It was mainly due to the higher average selling price of the new 2021 Li ONE and also the cost control effort of our internal team, supply chain team, despite the semiconductor shortage. On this year's gross margin, we still want to keep our previous guidance. For the promotion, currently the customer has about six to eight weeks of waiting time, so no need to do more promotion to let the customer wait too long. Yeah. Yeah, currently-
Okay.
At least in the next-
Yeah. two to three months, we won't do that. Yeah.
Got it.
Thank you.
My second question basically want to follow up on the wait time, because as you mentioned, the wait times for your new Li ONE are as long as like six to eight weeks. If the company fails to deliver the vehicle before Chinese New Year, should we worry or concerned about the rising order cancellation rate early next year or the new order intake will fall substantially towards the end of this year and any precaution the company can or will take to avoid such order volatility? [Non-English content]
Tim, this is Kevin. First of all, we don't expect that we'll see any order cancellation due to the prolonged delivery lead time because before we take the order from our customer, normally we'll reach agreement with them in terms of roughly when they can expect the delivery. Basically, when they give us order, they already have the expectation set for the delivery. Yeah.
Great. Thank you very much.
Thank you, Tim.
Your next question comes from the line of Bin Wang of Credit Suisse. Please ask your question.
Thank you. I got two questions. Number one is about 2022 guidance, volume guidance. Second question is about battery cost outlook for next year because then, and rumors say that the battery cost may be increased. [Non-English content]
I will take the first question. One moment. I think due to the current supply chain shortage, I think it's not the right time to give guidance for next year. You should believe within the company we have a very robust plan for the next year. Yeah. Maybe Kevin, the second question.
Yeah. Of course, we all know that right now we all see a big jump in terms of raw material cost for the batteries. So far, within this year, we have no plan to increase the price with the CPL. Yeah.
Yeah. Also, I think we are less impacted as we do EREV. Yeah. We have a less battery pack.
Thank you. Great.
Thank you.
Your next question comes from the line of Ming-Hsun Lee of BofA Securities. Please ask your question.
Hi. Thank you. Management, I have two questions. The first question is regarding the new functions of your NOA to be upgraded in December. Could you elaborate more functions of this new service? Secondly, also, could you elaborate more the credit sales in the third quarter and then the potential contribution in the fourth quarter as well as 2022? Thank you. [Non-English content]
Okay. I will take the second question first. This is Johnny . I think we have already sold off all the NEV credits beginning from last year's sales. Basically it's around RMB 200 million with all the NEV credits over 70,000 last year. They won't have more revenue for the fourth quarter. Yeah. For the first question, I will pass to Wang Kai.
Yeah. This is Kai speaking. Regarding your first question, our NOA feature will be released in December, and so far we have lots of testing over 1 million km. Since our 2021 Li ONE model has NOA feature by default, which makes our December OTA update the biggest NOA release in scale in China. I think this is probably the biggest difference compared with our peers. Thank you.
Thank you.
As a reminder, if you wish to ask a question, you will need to press star one on your telephone and speak closer to the mouthpiece or speaker phone. Thank you. Your next question comes from the line of Paul Gong of UBS. Please ask your question.
Yes. Thanks. Thanks for taking my questions. Basically two questions. The first one is regarding your product pipeline. We have observed that in this rising competition environment some peers has already accelerated their new products launch or adding new models or more models into the pipeline. How does Li Auto consider and your action on this? [Non-English content]
Paul, this is Kevin. In terms of our future product, actually, we will unveil our X 01 to the market in the second quarter next year, and then start to deliver it in the third quarter. More details of X01 will be introduced at the launch event. Although we see a lot of new product launching to the market, but we want to still keep to our own schedule. Right now, for example, when our Li ONE delivery volume reaches the level of Highlander, its residual value is also getting close to the Highlander level. This is the benefit of reaching scale by a single model.
We would choose to sell big volume with one model rather than very quickly launch a lot of models, but only sell a small volume. Yeah. Our philosophy is slightly different than our peers.
Okay. My second question is regarding the ADAS going forward. It seems that now the different ADAS system by different car makers are getting a little bit similar to each other. Everyone would adopt lidar, everyone would use NVIDIA chips with high calculation power. What is the key differentiation in this competition, the ADAS function going forward for the relatively longer time? [Non-English content]
This is Kai speaking. Regarding this ADAS related topic, we believe ADAS technology eventually I think user experience is the most important thing. In order, let's say, to achieve automated user experience, in the previous quarter, we already explained. You need massive data to train your algorithm to make it more intelligent. As you know, Li Auto, we have the biggest basically customer base with NOA feature by default because we believe safety is very important to every single one of our customers. Therefore, by using the complete fleet, we can speed up our progress of development to make the user experience reach much faster speed than our competitors.
Thank you.
Okay, thank you very much.
Once again, if you wish to ask a question, please press star and the number one on your telephone keypad. Your next question comes from the line of Chang Liu of CICC. Please ask your question.
Oh, yeah. Thank you for taking my question and congrats on the great result. My first question is regarding our cost, 'cause we see that the COGS per vehicle rise to RMB 232,000 in third quarter, which is RMB 5,000 more than second quarter and also it's the highest quarter, I think, since 2020. Could you share the reason with us, maybe how much is caused by the rising cost of X01 model and how much is caused by the rising price of material? [Non-English content]
I think we generally still target to achieve our desired gross margin of Li ONE. As we mentioned before, it will be finally to achieve 25% as we design the product. Currently, we are under pressure of the supply chain cost pressure, and it's slower than we expected last year. It's a mix of our supply chain effort and also those measures from the semiconductor parts. Also we have, with the volume increase, we have some benefit from the manufacturing side. It's a net impact for each quarter. [Non-English content]
This is Kevin. I will translate. Mr. Li Xiang just made some comments on the gross margin. Yeah. Our philosophy is, healthy gross margin is very important for us, especially we are a technology company. If we look at the previous generation of some of the previous generation technology companies, they have a very thin gross margin, therefore they cannot invest enough money on the R&D. Most of their R&D money spend on the product development.
Not enough in the technology development. Our thinking is that we want to keep a very healthy gross margin so that not only we can invest in the product development, but also we'll invest more and more on the technology development. 10% of the technology R&D.
Yeah, thank you. My second question is regarding the expansion of sales network. As we see, we already have over 150 stores by the end of third quarter, which is close to our target, which is 200 stores by the end of this year. Could you please update our plan for our sales network expansion for this year and also next year? [Non-English content]
This is Kevin. Right now we are on track to achieve 200 retail stores by the year-end to cover around 100 cities within China. Next year, our initial plan is to at least double the number of retail stores.
Yeah. Thank you.
Your next question comes from the line of Jeff Chung of Citi. Please ask your question.
[Non English content] My first question is with regards to the November order backlog. Would that be 100% higher than the actual potential November shipments, similar to the momentum in October? Secondly is about the monthly production runway. Can the chip supply support around 14,000-15,000 unit per month in the first quarter next year? Thank you.
Thank you, Jeff. This is Kevin. First question, October delivery was impacted by both the Bosch ESP supply and also the millimeter-wave radar supply. That's why you see that our order intake is around double the number of the final delivery. This month, actually the millimeter-wave radar supply shortage has been solved. The only constraint we have is from Bosch. Therefore, the order intake will not be 200% of the delivery. Yeah.
Your second question, actually, right now, the highlight we have is, in the first quarter of next year, we will still continue to be constrained by this Bosch ESP component. Right now we are working with Bosch to try to solve as much as possible. Yeah.
Okay. Thank you.
Thank you, Jeff.
As a reminder, for those participants who wish to ask a question, please ask your question clearly and come closer to your speaker phone if you're on a speaker phone. Your next question comes from the line of Jia Lou of BOCI Research. Please ask your question.
Hello, management. This is Lou Jia from BOCI Research. I have two questions. One is about the SG&A ratio. Actually, we have seen that this year SG&A ratio increased compared with last year. Just now, management mentioned that the target for R&D ratio is 10%. I want to know what about SG&A ratio stands level. My second question is about the capacity. We know that we are building the new plant in Beijing. I want to know what's our detailed capacity levels in 2023. You know, we know that we have the Changzhou plant for EREV, so any expansion plan for Changzhou plant. [Non-English content]
Thank you, Lou Jia. This is Kevin. First of all, for the SG&A, the highlight I can give to you is that, for the immediate next step, our plan is to control SG&A to a 10% level. For the longer term, especially with the volume growth, we plan to further decrease this percentage. This year you see a slight increase on the SG&A is because on one hand the promotion and also especially the aggressive sales network expansion increased our SG&A percentage.
In terms of capacity, by the end of 2023, our plan is to reach a standard annual capacity of 500,000. With the double shift, actually, we can do the total capacity near 700,000 units. That's our plan for 2023.
Thank you.
As we are reaching the end of our conference call, I'd like to turn the call back over to the company for closing remarks. Ms. Janet Zhang, please go ahead.
Okay. Thank you everyone. That's all for today's call. Hope you have a good one.
This concludes today's conference call. Thank you for participating. You may now disconnect.