Hello, ladies and gentlemen. Thank you for standing by for Li Auto's Second Quarter of 2021 Earnings Conference Call. And at this time, all participants are in a listen only mode and today's conference call is being recorded. I will now turn the call over to your host, Janet Zhang, Director of Investor Relations of the company. Please go ahead, Janet.
Thank you, Annie. Good evening and good morning, everyone. Welcome to Li Auto's Q2 2021 earnings conference call. The company's financial and operating results were published in the press release earlier today and are posted on the company's IR website. On today's call, we have our President, Mr.
Kevin Yanan Shen and our CFO, Mr. Johnny Tian Li to begin with prepared remarks. Our Founder and CEO, Mr. Xiang Li and our CTO, Mr. Kai Wang will join for the Q and 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 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 website 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 results announcement, which contain a reconciliation of the 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. First of all, we are proud that our Class A ordinary shares started trading on the main board of the Hong Kong Stock Exchange on August 12, opening a new chapter for our company. We are honored and also humbled by the support we received from all investors. With the Hong Kong dual primary listing, we significantly strengthened our equity base with over US1.5 billion dollars of net proceeds raised.
This will provide strong financial support for our R and D initiatives and the direct sales and servicing network expansion as well as enhanced protection for our shareholders. We will continue to take the responsibilities associated with being a publicly traded company seriously, work to build out our long term vision and create value for our users, shareholders and our employees alike. Next, moving to the key highlights of our 2nd quarter results. Our 2021 Li-one has been an exceptional performer since its debut on May 25. Our 2021 Li-one boosts an enhanced NEDC range of 10.80 kilometers, optimize the mobility comfort and a more intelligent cockpit.
It has received rave reviews and strong user endorsement for its outstanding features and performance. Our 2nd quarter deliveries achieved 17,575 units, increasing 166 percent year over year. Our July deliveries reached 8,589, hitting a new record. In July, Liwan topped sales charts in the new energy SUV and large SUV categories according to new car insurance registration data reported by China Automotive Technology and Research Center. It is a powerful testament to Liwan's highly competitive product features, making us a leading domestic NEV manufacturer in China.
While these rankings and Liwan's strong performance and popularity are exciting achievements, Yesterday's home run do not win today's game. We will continue to be disciplined and dedicated, and we will strive to constantly surpass ourselves in products and services to earn the support, trust and the loyalty from our users. Our record high deliveries would not have been possible without cooperation and the assistance of our supply chain partners. They have been helping us navigate the ongoing semiconductor shortages. Turning to the profitability.
Our gross margin reached 18.9% this quarter, up 5.6% points year over year and 1.6% quarter over quarter. Our operating cash flow was RMB1.4 billion or US218 $1,000,000 during the Q2, demonstrating our consistent high operating capability. In the second quarter, we aimed to further broaden and deepen city coverage to address increasing demand from prospective users across China and prepare ourselves for our new model launches in 2022 and beyond. Thus, we accelerated the expansion of our direct sales and servicing network. As of July 31, 2021, we had 109 retail stores covering 67 cities and 176 servicing centers and the Lee Auto authorized body and paint shops operating in 100 and 34 cities.
We are on track to reach our year end target of 200 retail stores. We have extended our footprint to lower tier cities in China. In August, we opened a retail store in Lhasa, Tibet. This has taken us direct sales and servicing network, geographical coverage of provinces, autonomous regions and the centrally administered municipal police in Mainland China to 100%. The industry wide semiconductor shortage has affected our monthly deliveries in recent months, resulting undelivered backlogs as our new order exceeded 10,000 in June.
We tried our best to utilize alternative solutions to enhance our flexibility and acquire industry sources. Going forward, we'll continue to collaborate closely with our supply chain partners to mitigate the semiconductor shortage and minimize the impact on our production. Given the proven success of our LiWAN catering to the needs of families, we are working to diversify our product portfolio to appeal to an even broader family user base. We have 3 platforms under development: the X platform for our next generation eREV with the first model to be released in 2022 and the Whale and the Shark platform for our VEV models to be launched in 2023. The development of these new platforms are progressing smoothly, and we are confident to launch new vehicle models sometime.
In July, we also signed a MoU with a local company for collaboration in reconstruction and expansion project of an automobile manufacturing plant in Beijing. This will further expand our production capacity and support the increasing vehicle sales volume with future models. On August 27, 2021, we also signed an investment agreement with a wholly owned subsidiary of Xinqing China Power Holding Limited to form a new company in Mianyang, Sichuan Province, China to develop and manufacture our next generation REN extension system. We firmly believe that smart eREVs will be a superior replacement to ICE vehicles and increase the overall NEV penetration rate in the medium to long term. We continue to view it as one of our core strategic development directions.
The corporation will leverage the R and D and the production capabilities of both companies to provide high quality products and further expand market share of smart eREVs in the domestic market. With respect to international market, we will keep our strategy to always make sense before taking actions as we want to be a winner, not just a mere participant in the global market. To win much share overseas, a car company has to develop the right product to attract customer with tastes and requirements that are different from domestic customers. We have set up a team dedicated to the overseas market, and we are meticulously working on the plans to find a winning formula. As a corporate citizen, we are proud to have passionately engaged in social relief activities to help people in need.
In July, in response to the flood in Henan Province, we organized the emergency relief with donations to support the affected people, including our users. We also mobilized all trailers
we have access in the adjacent adjacent provinces to join the rescue efforts. In addition, we provide our users with service such as warranty extension for replacement parts, free
replacement of flood damaged charging posts and free vehicle inspection for all disaster stricken vehicles. We made our efforts to reassure them and help in any way possible for a smooth transition back to normalcy. Lastly, we achieved a AA MFCI ESG rating in April, making us a leader in ESG among 40 rated automotive companies. Going forward, we will continue to undertake social responsibilities and view this as an integral part of our mission to build smart electric vehicles that make families happier. Now I will turn this call over to our CFO, Mr.
Keh Li, to review our financial performance in the Q2.
Thank you, Kevin. Hello, everyone. I will now walk you through some of our financial results for the Q2 of 2021. Due to the 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 Q2 of 2021 were RMB5.04 billion or US780.4 million dollars representing an increase of 40.7 percent from RMB3.58 billion in the Q1 of 2021.
This included RMB4.9 billion or
$759,400,000
from vehicle sales, which increased 41.6% quarter over quarter. This increase in vehicle sales was mainly driven by the increase in delivery of the 2021 Li ONE since its release on May 25, 2021. Revenues from other sales and services were RMB135.7 million or US21 million dollars in the Q2 of 2021, representing an increase of 21.7 percent quarter over quarter. The increase in revenue from other sales and services over the Q1 was mainly due to the increased sales of charting stores, accessories and services in line with higher accumulated vehicle sales. Cost of sales in the second quarter was RMB4.09 9 billion or $632,900,000 representing an increase of 38.2 percent quarter over quarter.
Gross profit in the Q2 of 2021 was was RMB952.8 million or US147.6 million dollars growing 54.5 percent compared with the Q1 of 2021. Vehicle margin in the 2nd quarter was 18.7%, compared with 16.9% in the Q1 of 2021. The increase in vehicle margin from the Q1 was primarily driven by higher average selling price in the Q2 of 2021 due to our launch of 2021 Liwan in late May. Our gross margin in the Q2 of 2021 was 18.9% compared to 17.3% in the Q1 of 2021, which was mainly attributable to the increase of vehicle margins. Operating expenses in the Q2 of 2021 were RMB1.49 billion or US230.6 million dollars representing an increase of 45.3 percent quarter over quarter.
Research and development expenses in the Q2 of 2021 were RMB653.4 million or US101.2 million dollars representing an increase of 27% quarter over quarter. Excluding share based compensation expenses, non GAAP research and development expenses were RMB543.7 million or US84.2 million dollars increasing 36.6 percent quarter over quarter. The increase in research and development expenses over the Q1 of 2021 was primarily attributable to the increased high count and the increased research and development activities for the company's future vehicle models. Selling general and administrative expenses in the Q2 of 2021 were RMB835.3 million or $129,400,000 representing an increase of
63.8%
quarter over quarter. Excluding share based compensation expenses, non GAAP selling, general and administrative expenses were RMB780.9 million or US129.9 million dollars increasing seventy 3.6% quarter over quarter. The increase over the Q1 of 2021 was primarily driven by increased marketing and promotion activities, as well as increased headcount and rental expenses, with the expansion of the company's distribution network. Loss from operations in the Q2 of 2021 was RMB535.9 million or $83,000,000 representing an increase of 31.4 percent compared with the Q1. Excluding share based compensation expenses, the non GAAP loss from operations was RMB365.5 million or US56.6 million dollars representing an increase of 62.6 percent quarter over quarter.
Net loss was RMB235.5 million or US36.5 million dollars in the 2nd quarter of 2021, compared with RMB360 1,000,000 net loss in the Q1 of 2021. Non GAAP net loss was RMB65.1 US10.1 million dollars in the Q2 of 2021 compared with RMB177 million net loss in the Q1 of 2021. Now turning to our balance sheet and cash flow. Our cash and cash equivalents, restricted cash, time deposits and short term investments totaled RMB36.53 billion or US5.66 billion dollars as of June 30, 2021. Operating cash flow in the Q2 of 2021 was RMB1.41 billion or $218,000,000 Free cash flow was RMB982.1 million or $100 and $52,100,000 in the 2nd quarter.
And now for our business outlook. For the Q3 of 2021, the company expects deliveries to be between 25,000 and 26,000 vehicles, representing an increase of approximately 188.7% to 200.2% from the Q3 of 2022. The company also expects the Q3 total revenue to be between RMB6.98 billion and RMB7 point 25,000,000,000 or 1.08 billion dollars and 1.12 billion dollars representing an increase of 177.8 percent to 188.9 percent from the Q3 of 2022. This business outlook reflects the company's current and preliminary view on the business situation and market condition, in particular, the ongoing industry wide semiconductor shortage due to the global COVID-nineteen pandemic, which are all subject to change. I will now turn the call to the operator to facilitate our Q and A session.
Thank you.
Thank you.
The first question is from the line of Fei Fang of Goldman Sachs. Your line is open. Please go ahead.
Great. Thanks for the opportunity. Congratulations on the results. Can management talk a little bit about competition and regulation? So on competition, some of your incumbent peers have really speed up launching new products, Weibo, JV, BYD for instance.
The frequency of their launches have increased and the hit rate seems to also increase. So just wonder if you have refresh thoughts on their progress and also the potential for them to enter into the premium segment. So that's the first question. 2nd is about regulation. So what's your thoughts on regulatory risks around autonomous driving and assisted driving development?
Do you think if there is any regulatory intention to slow down things a bit in order to perfect the safety and customer experience?
Fangbei, this is Kevin. Thank you for the question. I think for the product development cycle, we have our own strategy and schedule to launch new product. So basically, we are accelerating our development, our next generation of eREV platform and also the HPC BV platform. As we shared before, we will roll out our brand new eREV models based on our next generation eREV platform next year.
And 2023 will have will be a big year for us. We'll have 2 new models on the X platform and another 2 HPCB model launch. And for the regulation, in fact, we have been closely communicating and engaging with the authorities. I think the intention from the MIIT is to standardize the overall smart electric vehicle industry and raise the technology requirement for the ADAS solution. I think overall this is a good thing.
This will ensure the healthy development of this industry. And I think the impact to us is basically in the future, we need to be more cautious when we launch the product with ADAS solution. I think it will take us more effort to fully develop a function before the launch into the market. But that's what our regional plan. So there is no change of our strategy.
But overall, I think the our focus on ADAS will not change.
This is very helpful color. Thank you, Kevin.
Thank you. Thank
you. Our next question is from the line of James Hsu of Morgan Stanley. Your line is open. Please go ahead.
I have two questions. The first question is, could the management team shed some light on what components or type of chips are currently in short supply for Lioto? Because if you look at the numbers, I think Lioto's production seems more resilient than peers. So how can we manage the supply disruption better than our peers? Is there any alternative sources Leota could secure the component and the support likely more than 12,000 monthly run rate into Q4?
So this is the first question about the supply. And my second question, I think Johnny touched briefly on during the presentation. What's the progress in our new plans for capacity expansion in Beijing? What's the nameplate capacity and when will the contribution from the new capacity start to kick in?
Thank you, Tim. This is Kevin. I will answer the first question about the shortage. Right now, the single biggest shortage we are facing is an industry common shortage due to the COVID-nineteen situation in Malaysia, especially from ST. So this is industry common shortage.
And in the past several months, we have been fighting every day for the supply. I don't think we our situation is better than the other competitors. But the outlook for the next quarter, if the COVID-nineteen situation will getting better, we believe overall the industry supply will become more balanced. But the COVID-nineteen situation is not predictable. So it's still a risk for us.
Yes. Johnny, you want to comment on this?
Yes. For the Beijing side, I think we will release more details in the future. One thing we can make sure is it's on track to get ready for the BEV launch in 2023, Tian. Thank you.
Great. Thanks for sharing.
Thank you. Our next question is from the line of Ming Shun Lee of Bofa Securities. Please go ahead. Your line is open.
Thank you. My first question is regarding the gross margin improvement trend, especially in the second quarter, your ASP is increasing, but also your cost of goods sold per car is also decreasing. So could you elaborate more and also comment on the Q3 and the Q4 trend? That's my first question. And second question, could you give us more details regarding your collaboration with Xunxuan Power on the cooperation of Yiayu?
Thank you.
Lee, thank you. This is Kevin. Very quickly, your first question, besides the sales price increase of the new D1, from the cost perspective, primarily, we had partially due to the bond cost reduction from some of our suppliers and also because of the sales volume increase, therefore, the amortization will reduce. So that's the result that's result in the gross margin increase. I think for the Q3 and the Q4, we'll continue to see the gross margin will gradually improve also.
So we still see that overall for this year blended gross margin will be somewhere between 19% to 20%. The second your second question is about our joint venture with Xinjiang Dong Yi. Actually Xinjiang Dong Yi is a leading engine company in China, especially they have been a long term partner with BMW. So we have this joint venture, jointly R and D developer and manufacturer, our next generation, EV engine with Xincheng. And for this joint venture, we have 51% of the share.
Thank you, Lee.
Thank you.
Thank you. Our next question is from the line of Bin Wang of Credit Suisse. Your line is open. Please go ahead.
Thank you. I've got two questions. Number 1, about long term borrowing. So we found out in the Q2, our long term borrowing actually had go to $5,600,000,000 Given you have so many cash on hand, can you explain why the debt had a big jump in the end of June? That's number one question.
Number 2 is about the volume guidance. You actually used to be guiding September number can go to 10 ks. But if you see the 3rd quarter guidance, it seems like if we maintain the 10 ks guidance for September, then that August should be a very low number. So how should we think about the 3rd quarter guidance? And we also actually have 1,600,000 units by 2025 and in prior to maybe next year probably about 150,000 units.
So I'll do next year 2022, the volume should be 150,000 units? Thank you.
First of all, the long term borrowing because of the launch, we do a CV in April. So it's yes, it's the CV on the long term borrowing.
Yes. This is Kevin. Thank you, Wang Bin, for the question. I think when we give out the guidance for Q3, we have already taken into consideration of the potential risk of the impact of the COVID-nineteen in Malaysia. So therefore, we don't want to be too aggressive.
So I think today is already the 30s. So in next 2 days, you will see our August number. And for the next year, I think your estimation is within the range of our plan. Yes, yes. Of course, we want to further increase the monthly delivery of Liwan.
Thank you.
Thank you. Our next question is from the line of Chang Liu of CICC. Please go ahead. Line is open.
I'll translate my question. My first question is about our financial expenses. Could you give us some details on the acceleration of SG and A in Q2 and any guidance on the full year R and D and SG and A expenses? And my second question is on our pure electric models to be launched in 2023. Could you give us some other updates on its development, especially some key mass high pressure charging system?
Thank you.
Yes. For the SG and A, this is Johnny. And for the SG and A, it is as I just mentioned, it's more related to the network expansion and also the marketing and the promotion activities in the Q2. And we will also and also the increased headcount and the rental expenses. And in the second half of this year, we will continue to expand our retail stores towards our target 200.
And for R and D, we still want to keep our the whole year guidance, which is around RMB3 1,000,000,000. The second question, Kevin?
Yes. This is Kevin. For the HPC BED models, we are on track in terms of R and D process. To share some of the milestones, we for example, we already have our 4C new battery heat sample ready. Yes, so that's a big milestone.
And also for our HPC superfastcharging port design, we have already finished the concept design and we plan to have our 1st pilot charging station within this year.
Thank you.
Thank you. Our next question is from the line of Xinyu Fang of UBS. Your line is open. Please go ahead.
Hi. I'm not sure if this is my line. This is Paul Goh with UBS. I have two questions. The first one is regarding your split of the BEV versus the platinum versus the EUV in terms of positioning.
Starting from 2023, you have growth. How do you position the different segment and the size of each segment? And how should we think? Is this going to be the EUV is more focused on the larger vehicle, SUV, MPV, etcetera, and the BUV more focused on the smaller vehicle, like the sedan, etcetera? How should we think about the different positioning of the BUV versus EUV?
My second question is regarding your R and D spending split going forward. For second half of this year, for next year and going forward, how much portion is going to be spent on the BEV? How much on the EUV and how much on the autonomous driving? Let me translate my questions quickly.
Paul, yes, let me take the first question. This is Kevin. So in the future, when we have a BEV and the ER EV at the same time, actually we are not differentiate these 2 based on size and based on size of car form factor. So basically, the all these 2 driving powertrain will based on these developer cars to cover the price band from RMB 200 to RMB 500 and they will each will have a different size of cars designed for family users. I think the key difference between these 2 are based on the customers' preference, if they are more concerned about the BEVs range anxiety and they don't have access to good charging infrastructure, they will choose we believe they will choose ERED.
Yes, if they have a good charging infrastructure, they will choose VED. So that's our viewpoint. Yes.
Yes. So the R and D expenses, we still want to keep our original guidance from now on to 2023 to US1 $1,000,000,000 And yes, that will cover the vehicle, the coming models and also the autonomous driving and also some area we're going to do in house in the next 2 to 3 years and also some investments on the R and D side for the future intelligence type in side. Thank you, Paul.
Thank you.
Thank you. Our next question is from the line of Yingbo Hsu of ZX. Please go ahead. Your line is open.
My first question is how what's our pricing strategy? Are we trying to maintain our high margin or maybe we have more flexibility in the pricing item? And the second question is that considering a lot of new commerce in this sector, maybe 2023 is a period that a lot of new commerce join in and they launch new model. And by the year 2025, maybe the market share is going to be concentrated again. So how we expect the next 3 or 5 years competition like technical products and also accessories?
So could you give us some colors? Thank you.
Yes. Thank you, Inbal. This is Kevin. First of all, about the pricing, from our point of view, for each of the products, we designed based on a price point and unless we see the competitiveness issue, otherwise we will not alter the price point of this product. I think to answer your question in another way to gain more volume definitely we'll launch product cover wider price band.
So as we mentioned that in the future our product will cover between RMB 200 ks to RMB 500 ks. That's not to say we are going to reduce the price of some of our product. We are going to design different product to cover different price point. Yes, that's our philosophy. And also by the way, the market size of between 200 ks to 500 ks is increasing.
Yes, that's probably the only increasing segment in the yes, it is a segment the volume is increasing. Yes. And about the future competition starting from 2023, I think we will stick to our 3 key choices. Yes. So the first one is that we compete in the overall PV market.
Yes, that's why we designed that's why we believe we have to solve the risk anxiety issue. That's one of the core value we want to deliver to our customer. That's why you see we already have a eREV solution and we're going to have our next generation eREV solution to completely solve the Regency anxiety issue for our customer. And this is our mid term, long term strategy. We'll continue to launch eREV product.
On the other hand, we also see the opportunity to solve the range anxiety issue with high power charging solutions. Yes. So that's why we have this new wheel and shark platform. This is the first choice. The second choice is our target customer choice.
We want to focus only on the family users. We see this is a growing demand segment. And when we design our car, we want to design the car catering the needs of all the family members. The third thing is that we will continue to focus on the autonomous driving solution development and also the smart cabin solution development. So these three things are the fundamental building block of our product competitiveness.
We don't think we'll we believe we'll stick to these three key things.
Thanks, Kevin. That's very helpful. Thank you.
Thank you. And 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. Janda Zhang, please go ahead.
Thank you, Annie. Thank you once again for joining with us today. If you have any further questions, please feel free to contact Liotta's Investor Relations team. Then that's all for today. Thank you and have a good one.