Everyone, I'm the host Michael Lyu, the Auto Industry Analyst from AceCamp. Welcome to Leapmotor's third quarter 2022 earnings conference call.
The management representatives on today's call include Leapmotor's Founder, Chairman, CEO, Mr. Zhu Jiangming, Company's Secretary of the Board, Senior Vice President, Ms. Jing Hua, and Company's Chief Finance Officer, Mr. Cho Kwong Lun .
[Non-English content ] Later in the Q&A session, for participants through PC or App, please click the "Raise Hand" button at the bottom of the screen to queue up for voice questions or text your questions as messages.
For participants by telephone, please press star one to queue up to ask questions. [Non-English content ] Before we continue, firstly, is the disclaimer.
Please be reminded that the 2022 third quarter results conference call may contain forward-looking statements, including but not limited to statements regarding our future financial position, strategies, goals, targets, and future developments in the markets where we participate or are seeking to participate. These forward-looking statements are based on some assumptions regarding our present and future business strategy, and on the future business environment, which involves known and unknown risks, uncertainties and other factors. We cannot foresee or control these factors, which may cause our actual results, performance or industry results to be different from the future results or performance expressed or implied in the forward-looking statements. We would like to remind you that you should not overly rely on the forward-looking statements contained in this result conference call. These statements only reflect the opinions of our management as of today.
We do not assume any responsibility to update or revise any such statements in response to any new information, future events, or other circumstances. The forward-looking events discussed at this result conference call may not happen or materialize due to different risks, uncertainties, and assumptions. This warning statement we made just now applies to all forward-looking statements mentioned at this result conference call. Moreover, the company stakeholders and potential investors are reminded that the 2022 third quarter results released today are based on the unaudited operational and financial information of the group. Such information has not been audited or reviewed by the auditor of the group and do not constitute, represent, or indicate the full picture of the total revenue or financial results of the group. Such results may be subject to change and adjustment.
The company's shareholders and potential investors are advised to exercise caution when dealing in the shares of the company.
[Non-English content ] Now let's turn the call to Mr. Zhu Jiangming to share the company's operation highlights of the third quarter.
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Good evening everyone, welcome to participate our today's conference. In the third quarter this year, we totally delivered 35,608 unit vehicles, up by 186% year-on-year. With the increase of sales volume as well as increase of the percentage of the C- platform model, our average selling price as well as gross margin has increased by large margin. We have also made a successful IPO.
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From September 28, 2022, we started to deliver our C01 model. C01 model is positioned as multi-scenario, smart luxury electric passenger vehicle with onboard our core powertrain system, smart driving system, and smart cockpit system. At the same time, C01 has took the lead realizing the mass production of CTC, namely cell- to- chassis technology. This technology integrates the battery with the chassis. The body architecture is the external structure of the battery pack, achieving the maximum structure efficiency, while at the same time improving the top body torsion stiffness by 25%. Coupled with the luxury independent suspension, the front wishbone and the real five link, giving you the maximum driving enjoyment.
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In the future, we will continue our full suite R&D capability. We will develop more new models with modularization and platform, which is highly efficient. We will soon launch our C11 extended range version. Next year, we will also launch C01 extended range version. The extended range will be very effective complement to our existing car model mix. At the same time, we will further provide extend price range by modifying the model so as to meet the demand of different consumers, so as to cope with ever- fierce market competition.
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We also continue to expand and improve our channel network. By October 31st, we totally have 514 stores covering 161 cities in China. In third quarter, we have introduced leading 3C electronic product distribution group, committed to have a 3D automotive new retail service network. In terms of supply chain, we have been very active to have industry coordination and collaboration to optimize our cost structure. We have entered into the strategic cooperation agreement with multiple automobile spare parts companies to have the sustainable, high- quality supply chain layout.
[Non-English content ] Thanks for Mr. Zhu's insights. Now let's turn to Ms. Jing Hua for a brief description of the company's third quarter financial data.
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Hi, dear investors, good evening! The 2022 Q3, our total revenue stands at CNY 4.288 billion, it is an increase of 398.5% year-on-year and also a 38.8% quarter-on-quarter. Also for our gross margin in Q3 this year is -8.9%. In 2021 Q3, this number was -44.5%. Also in 2022 Q2, this number was -25.6%. As for our R&D expenditure in Q3, it stands at CNY 404 million. Also it is an increase of 138.9%, from CNY 169 million in Q3 2021. Also it is an increase of 42.3% compared with Q2 2022.
Also for our net loss, it stands at CNY 1.34 billion, it was CNY 790 million in Q3 2021 and CNY 1.402 billion in Q2 2022. As for our operating cash flow, the number for Q3 this year is CNY -169 million, also for Q3 2021, it was CNY -369 million, for Q2 2022, it was CNY -196 million.
[Non-English content] Thanks for the management. Now we will change the call to Q&A session. Here's the instructions for how to ask questions. For participants through PC or App, please click the "Raise Hand" button at the bottom of the screen to queue up for voice questions or text your questions as messages. For participants by telephone, please press star one to queue up to ask questions. [Non-English content] We have collected many questions from the investors before. Firstly, I would like to ask management on behalf of the investors. [Non-English content]
Okay, the first question is, according to the statistics released in October, as we can see that the delivered units has experienced a relatively large decline. I'd like to understand what is the reasons behind? Also what is the total delivery anticipation for this year?
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I think there are two major reasons. First of all, we can see that in the early October, that is from October 1st to October 10th, due to the pandemic in Jinhua facility, we have to suspend our production temporarily back then. The second reason is that our C01 was launched in the end of September, in October, it is a climbing period in terms of production. Also the third is our C11, our C11 EREV is under the trial production back in October. On the other hand, the second major reason is that by October we have covered all of our accumulative orders, then there is the rising price of the battery and cause the markup of the whole vehicle. Therefore I think for all of us players in the market, we all see a decline in order placement.
[Non-English content] We will now open the call to online Q&A session. [Non-English content] The first question comes from Jeff Chung with Citi.
What's the adjusted GPM in Q3 versus Q2, and also what's the EREV GPM for C11 and C01? [Non-English content]
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For this question, the third quarter, the gross margin rate compared with the second quarter saw an improvement. As you know that the third quarter that is -8.9% gross margin versus the second quarter -25.6%. As you know that the gross margin rate for the extended range versus the BEV has improvement. This is the overall situation for your question.
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According to our accounting policy, the gross margin actually is gross margin adjusted after we remove the rebate. In 3Q, our gross margin has already turned to positive.
[Non-English content] The next question comes from Wu Pingyue with CITIC Securities.
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[Non-English content] Now I would like to translate my question.
First is about the GPM. As we can see, the third quarter GPM has improved really a lot. How do we see the contribution of the C11? Could we say that the T03 GPM is relatively stable and we can calculate the C11 GPM? Secondly, is it about our cash flow. As we can see, we are very efficient in terms of the using of cash, in terms of R&D, and also the extent of selling network. Now we have over CNY 10 billion on hand. Will we spend more money in terms of R&D? What is our guidance for CapEx and R&D and also sales and general expenses? Thank you.
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Okay. First of all, I will answer the first question regarding to the gross profit. Just now you have heard about the average number of our gross margin. Actually, if we look at the delivered units or the sold units, the C11 and the T03 are on par with each other.
If we look at the gross profits, actually C11 is slightly better than T03. Therefore, if we use the same statistical caliber as our competitors, because as you know, we adopt a dealership model. However, if we calculate in the rebate, that is to use the directly operating store model to do the calculation, actually, we have seen that our gross profit and also the gross margin in Q3 has already turned positive.
Therefore the C11 has contributed a lot in terms of sales and in terms of gross profit. So this is the answer of your first question. For your second question, first of all, I'd like to point out that we are very positive and upbeat about the next year, that is 2023. Because as you know, last year our sold units stands at 40,000, and this year it increased 3x to 120,000. Therefore we really paint a rosy picture ahead. This is because we have ramped up our production of the C- platform-based model. Under this model, not only we provide EREV as a nice supplement to the BEV, but also we provide facelift.
For instance, we have the upper trim level, and also we have lower trim level, and that is to widen the choice, to diversify the choice we have for our customers and clients, and to meet the demands of our market. Regarding to the capital utilization, we focus on the efficiency of capital utilization instead of only focus on the absolute number of input for our R&D. Actually in Q3, as you know, compared with our competitors, we really have done a really nice job in terms of financial performance.
Therefore, as I have said repetitively, we hold a very rosy picture ahead. Next year we will continue to improve our R&D input, but on a very steady base. Also we wish, we hope, and we firmly believe that our products, our vehicles will have the positive gross profit. Therefore next year we will see even better highlights in terms of our financial performance. Thank you.
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[Non-English content ] The next question comes from Wang Bin with Credit Suisse. Please go ahead.
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Actually, there are two questions. The first question is about next year, when the government subsidy will exit. What is your plan for next year? Also, with the rising price of the battery, what is your strategy to cope with the rising battery price?
My strategy is first, we will expand our product line. First, we will have the cost for value model launch. For example, like C11, this is what we call the low entry luxury model, to give our customers more choices to meet the customer demand. At the same time, we will also have the luxury model upgrade. For example, in 2023, we plan to have the luxury for the C11. So give other group of customers options. By different kind of strategy, we will further expand our product line to cope with the subsidy withdrawal and the battery price increase the situation. The second question is could management give us a certain guideline about next year's sales volume? The question from Mr. Zhu is, as you know that our sales volume this year is double or triple of the sales volume last year.
That gave us a great confidence for next year. We believe that next year our sales volume will be 2x of this year's sales volume. This is our plan for next year's sales. Thank you.
[Non-English content ] The next question comes from Nick Lai with JP Morgan. Please go ahead.
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Okay, the two questions. The first question is about the sales target and also its breakdown between the EREV and also the BEV. The second is about the pricing strategy of BEV and also EREV. For the first question, of course, going into the future, going into 2023, we believe that our C- platform- based models, that is our higher- value models, they will take a higher percentage. For instance, the C11, the BEV, and also the EREV, both are available throughout the year. Also for our C01, the EREV will be launched in 2023 Q3. Also for the BEV and the EREV split, actually for BEV already in the market, we have built word of mouth and they are popular among our customers. However, for EREV, we are starting from scratch.
Of course, we anticipate we will experience a very positive, a very strong growth rate. However, we cannot say for sure what will be the number of its sold units or delivered units, because we don't have the crystal ball here. Also regarding to the pricing strategy of the EREV, as you said, the pricing of EREV will be slightly lower compared with the BEV, and therefore it will be strongly competitive in the Tier 3 and T ier 4 cities in China. Thank you.
[Non-English content] The next online text question comes from Ren Danlin with CICC [Non-English content]
There are two questions. One is, we have seen that there is a gross margin rate improvement in Q3. Could you explain to us the reasons about this margin improvement in Q3? Is it due to the product mix improvement or is it due to the increase of the sales volume? Or what percentage is due to the change of the sales channel commercial or business policy? The second question is the pricing strategy for the C11 extended range. Also what's our delivery cycle or delivery pace for the C11 extended range?
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For that two questions. First question, for the improvement on the gross margin of the Q3, there are two major reasons. One is the improvement of product mix. As you know that the percentage of the C- platform has increased. This is the first reason. The second reason is the improvement on the average selling price. That's also due to we deliver more value product, so the average selling price increased. As a result, the gross margin has improved. Another reason, which is not so big as the previous two reasons, is we have also improved the commercial terms. The second question is for the C11 ER extended range pricing strategy. As you know, C11 extended range is modified model for the BEV C11. So in terms of pricing, it will be a little bit lower compared with C11 BEV.
And we are going to launch C11 EREV in Q1 next year. This is about pricing strategy for C11 EREV.
[Non-English content ] The next question comes from Liu Lan with Guosheng Securities. Please go ahead.
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[Non-English content] To translate my question. So how does the company plan to reinforce the advantages in automatic driving and in the future hyper mode? For example, in the pace of the functions OTA and the budget for the R&D investment. [Non-English content]
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First of all, regarding the new model, our goal is to provide diversified configuration and also options for our customers, and therefore we can widen the price range. Also regarding the automatic driving function, next year we will have the new platform, and based on this new platform, we will have new innovations regarding the automatic driving, and you can keep tabs on that, and they will be on board with our intelligence system. Also regarding the R&D expenditure, all I can say is that if you look at our numbers, the absolute number- wise it is increasing. This is because we are scaling up of our R&D team and we have increased the headcount. Also, I would like to say that if you look at the absolute number, the R&D expenditure is on the rise.
But if you look at the R&D expenditure, the proportion of it in the total expenditure, then it is on par with before. Thank you.
[Non-English content] The next question comes from Liang Yongho with China Merchants Securities. Please go ahead.
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Well.
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Actually, there are two questions. First question is regarding the sales channel. We have seen that you have more than 500 outlets. Most of them are distributors. How are you going to include the distribution channel efficiency? Are you going to adjust a rebate policy or tightening this rebate policy? The answer is, in the past, we have our self-owned store, as well as the dealer store. In the future, for the self-owned store, mainly we focus on the branding, and we will build up our brand image by our self-owned store while we will enter into the cooperation with the dealer, especially the concentrated larger leading dealers. For example, this year in Q3, we have entered into a partnership with the leading 3C, the dealer group, distribution group.
In the past, this 3C distribution dealer group was working with Apple and Huawei, these smartphone makers, and to help them to promote products very efficient. We leveraging these 3C dealer group network to build up a 3D distribution network to promote our products. Also in the future, we will make best use of various dealership, for example, even the internet influencers, the network and also traditional automobile network, and also 3C digital appliance network to have the integrated dealer sales network to help us improve the sales efficiency and also boost the concentrated, unified standard of the sales dealership. Secondly, as you know that for the dealer policy, we believe that we need to give them enough the profit margin to help them grow and to have the concentrated power to promote our products.
So far, we believe that we are not going to tighten any rebate policy for them. We need to give them room to make a profit. For the fourth quarter, there is a lack of the order, and also because of the lack order, the price, there is a little bit decline. We believe that we need to work on two sides. One is we need to ensure enough the growth margin, and also at the same time, we need to boost our sales volume. How to do that? We need to provide different kind of product range. For example, we need to provide both value for money model to the market to meet customers' demand for the value for money model.
We need to provide higher- grade, higher- luxury model for other group of consumers, so as to extend our price range, so as to meet different customers' demands. By doing that, we believe that we will be able to have very nice growth margin going forward. Actually, there is also second question. Second question is about Tesla. Recently, Tesla has price- cut strategy. Are you going to follow the Tesla's strategy, also lower your car's price?
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We are going to increase our product mix so as to meet a different group of demand. We will not unilaterally lower the price, but we will increase different options for our customers to meet their different needs.
[Non-English content] The next online text question comes from Chen Songen with ABCI [Non-English content]
The question is about the future capacity ramp-up plan of Leapmotor, and also what is the corresponding CapEx.
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To answer this question, first of all, by the end of this year, already we have the phase I and phase II facilities in Jinh ua already up and running. Under normal condition, actually the capacity will be 300,000 units. If pushed to the limits, it can achieve 360,000 units. This is about the capacity. Going to the future in the next several years, we plan to have a new facility in the Qiantang New District, which is also in Hangzhou area. It will be running by the end of next year or by the Q1 2024. Also the total capacity of this factory in the Qiantang New District will be 300,000- 400,000 units.
And also we plan to have the CapEx input of CNY 3 billion-CNY 4 billion , and this can be fulfilled by government supporting policy and also bank loan. Thank you. This is the answer.
[Non-English content] The next online text question comes from Qu Ke with CCBI [Non-English content]
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I think that question I elaborated a little bit in the previous question. I want to emphasize again, in the future, going forward, we will focus on the dealership as the major stage for us to sell our model. And while the director store will serve as a flagship, mainly promoting our brand image. This will be our feature.
And also we will be totally different with the traditional sales network, which are focusing on the luxury car sales. You go to the store and then place order. We will have more close connect with our customer. For example, our customer place order by apps, and then we will still be able to have very good relationship with the customer. This will be a big difference with the traditional dealership model.
[Non-English content] The next online text question comes from Wang Zhenfei with Zhongcai Shensheng Capital [Non-English content]
There are two questions. The first question is how many versions for the C11 EREV? And also the second question is: what is the plan for export? What is the situation for export?
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For the first question, for C11, the EV will have three different versions in order to answer to the needs of different customers.
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And also for the second question, this year we have already kickstarted our overseas selling, and currently we have sold 2,000 units of vehicles. I believe that going forward, next year we will see an even bigger increase here.
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This question is we collected from some people in advance. This is the relationship between Leapmotor and Dahua Holding Corporation. Also, some people question that the R&D of Leapmotor is low because the R&D cost is transferred to Dahua. Could you explain to us about that?
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First of all, Leapmotor and Dahua are two independent operating companies. They are in different industry. There is no undisclosed repetitive use of resources. Dahua is only the founding shareholder of Leapmotor. Currently, Dahua holds only 7.88% of Leapmotor's share.
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Actually, there are only two parts of the connected transition between Dahua and Leapmotor. The first is we purchase the sensor hardware used in the ADAS from Huaruijie, which is the subsidiary of Dahua, including the camera and radar, etc. The second part is Leapmotor has self-developed PCBA, and this is the self-designed and the self-procured the components, while also asking Dahua for the manufacturing. So that two parts of the connected transition has been detailed, disclosed in our perspective. That's only two parts of the connected transition between two companies.
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Some people say that the R&D cost of Leapmotor is much lower. That is because a lot of technology comes from Dahua Technology. Actually, that is not true. Why? When Leapmotor was established in 2015, many team members actually came from Dahua Technology with hardware, software, and system platform technology background. These are senior engineers, designers with a lot of experience from Dahua Technology. The starting ground of Leapmotor was very higher compared with other standard company. That is why we managed to reuse some existing technology, saving a lot of human resources and time. That is why the overall R&D cost of Leapmotor is quite lower compared with other competitors.
After 2015 onwards, we do not have any relationship in terms of R&D with Dahua Technology.
[Non-English content] The next online text question comes from Joanna Chen with Bloomberg Intelligence [Non-English content]
There are two questions from Joanna Chen. The first question is how about this year's new energy credit sales? What is its revenue contribution? The second question is about the split of the BEV and EREV in delivery in the long term, whether it is a 50/50.
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Regarding these two questions, first of all, for the first question, there is no credit sales this year because the price is low enough and it is not worth it. We will keep tabs on that. Also for the second question, in the next three to five years, we believe that EREV will have a large potential in the market. Before 2025, that is in the next three to four years, we will see the increase of the percentage of EREV in our delivery, in our sold units. It will improve to at least 50% or even higher. After 2025, we believe the cost of the battery will on the decline and also people's range anxiety will on a decline as well.
People will find that actually they do not need to use the range extender and also they will find that the charging piles is everywhere. Therefore people will go back from EREV back to BEV. This is our anticipation for EREV on going to the future.
[Non-English content] The next online text question comes from Zhao Yi with Pengshan Asset Management [Non-English content]
The question is, what is our management's view on the competitive advantage of the CNY 100,000-CNY 200,000 EREV against the PHEV?
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Regarding the competitive landscape between the EREV and the PHEV, I believe that most of the emerging car makers are focusing on the R&D of the EREV, while traditional car makers are focusing on the R&D of a PHEV.
Why that's the case?
According to my analysis, I believe that because of the traditional car makers' advantage, their advantage lies in the PHEV. When we set up our project two years ago, we also considered whether our company should go for the pathway of the PHEV. I think that the advantage of the PHEV is the engine-driven, especially in the super highway, that will save the gasoline. That's the advantage of PHEV. But I believe that in the city area, EREV is good enough. We don't need the PHEV. Also we consider the super highway using scenario only accounts to only 5% of the total road condition. Also, when you have the PHEV, you also need to have the one-on-one transmission gearbox, and also you need to increase the clutch. That's the increase on the cost side and also the complexity of the technology.
Therefore, balancing the pros and cons, finally, we decide we are going to focus on the R&D on the EREV.
Okay.
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The next question is could you provide a breakdown of the exported vehicle models? Also what is the pricing strategy of the exported models, whether it is different from our domestic ones?
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Regarding this question, first of all, I'd like to say that our export roadmap need to be aligned with our domestic development ones. Therefore we start from A00. Mainly our exported model is a T03, which is a relatively small volume vehicle. I know that it is much welcomed in, for instance, South America and also Middle East. Going to the future, we will have facelift models based on the C- platform, also we will have A- platform and also B- platform models. All these will be developed in a modular platform-based way, and it is highly efficient and effective. That means we do not have to make actual tweak for it to fulfill the demand of the European standard and also the American standard.
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Regarding the pricing, actually it is basically on the par with the domestic ones because for the export there is the tax refund. It's just like we have a subsidy domestically.
[Non-English content] Thanks to the management. Due to time limits, that's all for the Q&A session. [Non-English content]
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Thanks everyone for your attendance. If you have further questions, please feel free to contact Leapmotor's investor relations team. This concludes this conference call. Thank you.
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Thank you, the moderator, and also thank you all the investors and analysts.
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