Good day, ladies and gentlemen, and thank you for standing by, and welcome to the EHang Second Quarter 2022 Earnings Conference Call. As a reminder, we are recording today's call. Now I will turn the call over to Julia Qian, Managing Director of The Blueshirt Group Asia. Ms. Qian, please proceed.
Hello, everyone. Thank you all for joining us on today's conference call to discuss the company's financial results for the second quarter of 2022. The earnings release is available on our IR website as well as from Newswire services. Please note the conference call is being recorded, and the audio replay will be posted on the company's IR website. Today, EHang's management team, which includes Mr. Huazhi Hu, Chief Executive Officer; Mr. Xin Fang, Chief Operating Officer; and Mr. Richard Liu, Chief Financial Officer, will successively give the prepared remarks. Remarks delivered in Chinese will be followed by an English translation. All translation is for convenience purposes only. In the case of any discrepancy, management's statement in the original language will prevail. A Q&A session will follow afterward.
Before we continue, please note that today's discussion will contain forward-looking statements made pursuant to the Safe Harbor provision of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's actual results may be materially different from the expectations expressed today. Further information regarding these and other risks and uncertainties is included in the company's public filings with the SEC. The company does not assume any obligation to update any forward-looking statements except as required under applicable law. Also, please note all the numbers presented are in RMB and are for the second quarter of 2022 unless stated otherwise. With that, let me now turn the call over to CEO, Mr. Huazhi Hu. Please go ahead, Mr. Hu.
谢谢主持人Julia。大家好，感谢各位今天参加亿航智能的业绩电话会议。今年第二季度，亿航积极适应国内外的宏观环境，全球都在从新冠疫情的持续影响中逐步恢复，也让我们取得了良好的业绩。亿航在这样的环境中，为自己争取了难得的修炼内功的时间。同时，我们的订单、预订单、交付量和客户都在持续增长，尤其在中国和东南亚市场表现突出，推动了第二季度总收入环比大幅增长超过150%。我们在业务和金融等领域持续开拓战略合作伙伴，例如泰国最大的零售业公司正大集团和中国农业银行，为亿航未来业务的长期发展提供了强大的助力。稍后我们的COO和CFO会展开介绍。目前对于亿航最重要的事情，那就是亿航216S产品的适航审定工作。在这一方面，我们迈入了新的阶段。亿航在近半年来充分理解了欧美等国家通过近百年来总结的一套完整的航空适航理念，这个理念贯穿到产品从设计到量产的全过程，对航空业产品的安全制造和运行有着重要而深远的意义。在此，我要特别感谢那些用血和泪为我们总结经验的前辈们，同时对他们表示由衷的敬佩。但是在专用条件颁布之前，亿航这样的新品类的飞行器一直没有适合的适航标准。亿航的飞行器通过了自己的安全标准，提前产品化并量产。我们在近几个月的工作中，按照航空适航的理念和中国民航局共同努力，从头做起。首先，我们建立了符合航空业要求，又适合亿航管理体系的航空产品设计和生产管理保障体系。首先让每一个亿航人从我做起，充分理解适航的概念，符合适航的科学管理和设计方法，让亿航216的设计生产变得各环节受控，各流程科学。在这样的基础上，我们终于在Q2与民航局审查组就专项审定计划PSCP、审定基础和审定计划CP达成了一致。对于全球独特的无人驾驶航空器系统适航，我们参考了二十三部适航规章和国际公认的ASTM、SAE、RTCA、MIL等标准，借鉴传统航空器主机厂的构型管理和适航经验，也在无人驾驶航空器系统，包括无人驾驶系统、链路、地面控制系统等新课题上探索创新，总结归纳出适用于亿航216的十三个科目的符合性验证方法。我们在以往216的基础上，根据适航标准再次开展试验验证、摸底测试，并按照计划推进审定验证的活动。就在近期，中国民航局和广东省政府共同发布的《关于推进广东民航高质量发展战略合作框架协议》中，明确要加快发展航空制造业和通用航空新业态，其中明确把推动UAM城市空中交通相关试点工作和大力推动亿航智能EH216-S载人无人机型号合格审定工作作为2022年的工作重点之一。我们备受鼓舞，也进一步增强了取得TC许可证的信心。另外，今年六月，中国民航局在EHang总部所在的城市成立了广州航空器审定分中心，负责全国小型飞机的型号设计适航审定工作。目前，EHang VTOL系列VT-30产品正处于产品设计、适航、部件验证阶段。我们相信，这些得天独厚的有利条件和政策支持，为VT-30的设计、试飞和适航审定打下了坚实的基础。下面请我们的首席运营官方鑫先生详细介绍公司第二季度的业务进展。谢谢大家。
Here's the translation of Mr. Hu's remarks. Thank you, operator and Julia. Hello, everyone. Thanks for joining our earnings call today. In Q2, EHang actively adapted to the macro environment at home and abroad. The world was gradually recovering from the continued impact of the COVID pandemic. We were able to achieve excellent results. In such an environment, we not only spent more time and effort to strengthen ourselves but also continued to expand our orders, pre-orders, deliveries, and customers, especially in China and Southeast Asia. This drove up our total revenue in Q2 by a significant increase of over 150% from Q1. We continued to expand our strategic partnerships with business and finance partners such as the CP Group, one of the largest commercial companies in Thailand, and the Agricultural Bank of China.
These partnerships will strongly support EHang's long-term business development in the future. Our COO and CFO will elaborate on them later. The most important thing for us at present is the EH216-S airworthiness certification, and the process has progressed into new phases this year. It is based on our full understanding of the comprehensive set of airworthiness concepts that have been summarized by Western countries with their experience in the last century. This set of concepts has been embedded in the entire process of making an aircraft, from design to mass production, which has an essential and profound influence on the safe production and operation of aviation products. Here, I would like to express my sincere admiration and appreciation to the pioneering predecessors who contributed their valuable experience with tremendous effort.
However, before the CAAC issued the special conditions, there hadn't been any available airworthiness certification standards applicable to this new type of aircraft, like the EHang 216. In the early days, our AAVs conformed to our own safety standards, based on which we explored productization and production. As there was no precedent, we had to work closely with the CAAC to further develop these new airworthiness standards together. According to the relevant airworthiness concepts and principles from the past several months, we have established aircraft design and production management systems, which not only meet the requirements of the aviation industry but are also compatible with our own management system.
With that, every member of our team can work in line with the airworthiness concept and conforming to scientific management and design methods, so as to enable every process to be controlled and regulated from design to production of the EHang 216. In this regard, we finally reached a consensus with the CAAC expert team in Q2 on our project-specific certification plan and the certification basis, as well as the certification plan, respectively. In respect of the airworthiness process for this unique Unmanned Aircraft System, we have not only referred to the CCAR-23 airworthiness regulation and internationally recognized standards such as ASTM, SAE, RTCA, MIL, et cetera, and learned from the configuration management and airworthiness experience of conventional aircraft OEMs. We also made innovative explorations on new topics in Unmanned Aircraft Systems, including the Unmanned System, Datalink, and Ground Control System.
We worked out 13 means of compliance applicable to EHang 216. Based on our previous experience, we are continuing to carry out internal tests according to the airworthiness standards and planning activities for the demonstration of compliance. Based on the CAAC and Guangdong Provincial Government's strategic cooperation framework agreement for civil aviation development in Guangdong, they recently emphasized speeding up the development of the aviation manufacturing industry and new business forms of general aviation. Both the CAAC and the Guangdong government have clearly put pushing forward relevant UAM pilot projects and are strongly pushing forward the EHang 216 S AAV type certification process as their key tasks in 2022. It encouraged us and further enhanced our confidence to obtain the type certificate.
Moreover, in June, the CAAC newly established an aircraft airworthiness branch center in Guangzhou, where our headquarters is located, to be in charge of the airworthiness certification work for small aircraft nationally. Currently, the VT30, one of the products in our VTOL aircraft series, is at the stage of product design, airworthiness preparation, and component verification. We believe that these favorable conditions and the policy support in Guangdong can lay a solid foundation for VT30 design, test flight, and airworthiness certification. Next, I will turn the call over to our Chief Operating Officer, Mr. Xin Fang, for business highlights in Q2. Thank you. Here is the translation of Mr. Fang's remarks. Thank you, Mr. Hu. Hello, everyone. As the COVID situation in China has gradually stabilized since Q2 of this year, the tourism market has been recovering steadily.
The post-pandemic era expedited the transformation of tourism, such as scenic spots, by bringing innovative business models to scale up emerging consumption. in June this year, the CAAC issued the 14th Five-Year Plan for General Aviation Development to promote the development of low-altitude flight tourism by supporting related authorities to expand aerial sightseeing in more scenic spots and to establish a low-altitude flight tourism network connecting scenic spots, resorts, theme parks, and other tourist destinations. Under the national policy of supporting integrated development of aviation and tourism, we formed a strategic partnership with Tianxingjian Cultural Tourism Investment and Development LLC, an affiliated enterprise of the Jishou City Government in China's Hunan Province, with the plan to develop a scenic flight project at the Aizhai Wonder Tourism Area, a national five-A level scenic spot in Jishou.
In Q2, we delivered 5 units of EHang 216 AAVs for the customer's initial purchase order and initiated trial flight operations in Aizhai. The customer plans to purchase an additional 25 units of EHang 216 in the future. This project creates a replicable public and private business cooperation model for low-altitude flight tourism, which is helpful for expanding our ongoing business projects in other regions. According to statistics, China has more than 300 five-A level scenic spots and over 4,000 four-A level scenic spots, indicating tremendous market potential for expanding low-altitude flight tourism. Against this backdrop, we are making excellent progress in our 100 Air Mobility Routes Initiative. So far, more than 5,700 operational trial flights of EHang 216 have been conducted in a practical aerial sightseeing scenario at 11 operation spots in China.
After obtaining the airworthiness certificate, EHang 216 is expected to provide our tourism customers and end users with a unique, safe, technologically advanced, cost-effective, and pleasant low-altitude flight tourism solution and experience. In Southeast Asia, where the UAM market is also in high demand and has rich use cases, we are actively expanding our presence through the empowerment of local partners. In Q2, we received a pre-order for 100 units of EHang 216 AAVs from an Indonesian aviation company, Prestige Aviation, which is the largest pre-order we have received in Asia so far. We've also reached a strategic cooperation with CP Group, one of the largest conglomerates in Thailand, with an intent to establish a joint venture for introducing EHang AAVs to Thailand.
The two parties also intend to carry out comprehensive cross-sector cooperation in aerial tourism, aero logistics and transportation, urban mobility, and smart city management in the future. We expect signs of a business recovery in the second half of this year as we are actively adapting to the macro environment, continuing to move forward on EHang 216 certification, securing more product orders, and expanding our original aero media business in the European market. We remain confident in our growth potential and long-term outlook, given our core values and unique advantages. I will now turn the call over to our CFO, Richard Liu, for financial results. Richard, please go ahead. Thank you.
Thank you, Xin Fang, and hello, everyone. Before I go into details, please know that all numbers presented are in RMB and are for the second quarter of 2022, unless stated otherwise. All percentage changes are on a quarter-over-quarter basis, unless otherwise specified. Detailed analyses are contained in our earnings press release, which is available on our IR website. I will now highlight some of the key points here. In the second quarter of 2022, our strategic shift toward an urban air mobility platform continued as we aimed for a solution and operational service integrated model. The ongoing efforts are yielding positive results with increasing deliveries in China and orders or pre-orders in Asia, reflecting our solid business strength.
As we continue to focus on the EHang 216 type certification process, we also made further developments in our 100 Air Mobility Routes Initiative with continuously increased operational trial flights as well as an expansion of operation spots in China. Additionally, we struck a strategic partnership with the Agricultural Bank of China Guangzhou Branch for CNY 1 billion in indicated credit facilities to support our strategy execution and business growth in the following years. In Q2 of 2022, total revenues were CNY 14.6 million, representing an increase of 152.5% from CNY 5.8 million in Q1. This was along with a 166.7% increase in EHang 216 AAV deliveries in Q2 to 8 units from 3 units in Q1. Demand for our AAV products has been increasing both in China and internationally.
One typical example in China is that in Q2, we delivered 5 units of EHang 216 AAVs to a local government-backed tourism operator in Hunan Province for aerial sightseeing operational services. The customer planned to buy an additional 25 units as the project progresses. Another example is that we have obtained pre-orders of up to 210 units from customers in Japan, Malaysia, and Indonesia since the beginning of this year, and we see the trend of further expansion in Southeast Asian markets. Additionally, we were able to further drive a 4.6 percentage point expansion in gross margin to 67.1% in Q2 from 62.5% in Q1.
Even though our overall gross margin has already been at a high level compared to other new energy mobility product companies, such as electric car companies, this continued to show our competitive edge as the first mover in the global UAM and eVTOL industries. In Q2, our adjusted operating expenses, which are operating expenses excluding share-based compensation expenses, were RMB 63.4 million, compared with RMB 46.1 million in Q1. The increase was mainly attributed to continuous R&D of new AAV models and the ongoing EHang 216 certification process, both of which are progressing steadily, and professional service fees related to annual filing and other legal matters, and additional provisions for accounts receivable in light of the impact from the ongoing COVID-19 epidemic and the control measures in China. With that, in Q2, our adjusted operating loss was RMB 51.2 million, compared with RMB 41.7 million in Q1.
Our adjusted net loss was CNY 50.8 million in Q2, compared with CNY 40.9 million in Q1. Our balance sheet remains solid with CNY 240.7 million of cash equivalents, restricted cash, and short-term investments as of the end of Q2, even with a slight increase of CNY 3.8 million quarter-over-quarter. With that, we believe our business is on a good track. That concludes our prepared remarks. Let's now open the call for questions. Operator, please go ahead.
Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, please press star one and one on your telephone. We have the first question. Please stand by. The first question is from Tim Hsiao. Please go ahead. Your line is open.
Hi, management team. Thanks for taking my questions. I actually have two quick questions. The first one is, we've seen EHang making some good progress in terms of their customer acquisitions, especially in Asia over the past few quarters. I'm just wondering how many pre-orders we've received so far, and when do we plan to start deliveries? In addition, could I also get some updates regarding our collaborations with the government, what kind of contribution we should expect, and when do we think it's going to kick in?
My second question is about the funding and investment. We noticed that we have a partnership with the Agricultural Bank of China, which entitles us to around CNY 1 billion in syndicated credit facilities. I'm just wondering how we are going to use that, and if we are going to accelerate investment in the upcoming months. What kind of cash burn rate do you have? What does it look like now? Could you share a little more information about our investment plan in the upcoming quarters? Thank you.
Thanks for your questions. Please give us a second to relay them to the management team. We'll provide the answers along with the translation later. Thank you.
Hi, Tim. This is Xin Fang. Let me take your first question about orders. Since the beginning of this year, we have received a total of 210 pre-orders for passenger-grade AAVs in the Asian market. The more than 200 pre-orders in Asia are expected to be delivered in about three years, subject to customer needs and our obtaining the type certificate in China or other relevant certification in the local market. In addition to the pre-orders, we have also received some customer orders, both in hand and in discussions, which can be quickly delivered in a short time based on the customer's demands.
For example, in Q2, we received orders from the customer in Jishou and also completed deliveries for the first batch of five units, which have already been put into trial operations. At present, we are in talks with some local governments regarding potential cooperation and plans to set up operational centers in different regions in order to actively prepare for commercial operations once we obtain the type certificates. We have already signed a strategic cooperation agreement with certain governments.
Under this agreement, there will be some purchase orders that are planned to be completed successfully this year and are expected to make a notable contribution to our full-year results.
Hi, team. This is Richard. I will take your second question. Basically, this partnership is the first time that Agricultural Bank of China, one of the largest commercial banks, has partnered with and granted such syndicated credit facilities to us as an innovative eVTOL technology company. This represents that traditional financial institutions have started to tap into this type of new industry. It is a good sign not only for EHang but also, I believe, for the industry.
Basically, the 1 billion CNY indicated credit facilities cover comprehensive banking products and services of Agricultural Bank of China to support our operations and business development over the following years, including regular credit loans, financial leasing, supply chain financing, et cetera. As a starter, they have extended to us a 30 million CNY credit loan. Further, we have been discussing the financing and financial leasing options to facilitate our business growth after the TC is obtained. Thus, in the near term, money will be used more towards supporting operations and sales growth, particularly regarding CapEx investment.
We have an existing production facility. We will see how sales grow to plan for any future CapEx needs. Regarding cash burn, as you know, EHang has been running a lean operation in China, and this is somewhat EHang's unique style compared to others. You probably can get a feeling from our cash flow statements. If you'd like a rough idea of the current level, the average monthly cash burn rate of our operations is around CNY 17 million or roughly $2.5 million. Annualized, that would be around CNY 200 million or roughly $30 million.
As it is expected that sales would increase after the TC is obtained, the operational cash flow or the cash burn situation is expected to be further improved following that. Hope this answers your question. Yep. Thank you very much, Mr. Fang and Richard, for detailed sharing. Thank you.
Thank you for your question. The next question. Please stand by. We're taking the next question. Thank you for your question. The next question. Please stand by. We're taking the next question from Ling Lu. Please go ahead. Your line is open.
Thank you for taking my questions. I have two questions as well. The first one is, could the management team elaborate a little bit more on the business model for the AAV for the tourist attraction corporation? For example, will the tourist attraction be leasing or buying the AAV from EHang, or who will be operating the AAV and such? For my second question, now that we've seen that there are many competitors in the making of AAVs, what does the management team feel is the most important innovation to stay as the AAV industry leader? For example, is it battery or noise cancellation technology, or propeller technology, or having a command control center?
Like, what will be most crucial, and how is EHang doing in that particular area? Thank you so much.
Oh, thanks for the questions. Please give us a second for translation.
Of course.
Hello. I'm Xin Fang. I will answer your question. There has been a long-standing need for scenic spot aerial tourism and a business model. The traditional way is to have tour buses, helicopters, etc. Not only can these provide tourists with a novel experience of aerial sightseeing, but they can also be used as a point-to-point transportation tool within the scenic spot, which is favored by tourists and scenic spot operators.
Hi, Woody. This is Xin Fang. I will take your questions. The demand and the business model for aerial sightseeing in scenic spots have existed for a long time. Traditional methods, including cable cars and helicopters, can not only provide tourists with a fresh aerial sightseeing experience but also serve as point-to-point transportation vehicles in scenic spots, which are favored by both tourists and scenic spot operators. These traditional methods have certain limitations, such as the high cost and expenses for infrastructure, aircraft acquisition and maintenance, and professional pilots. Therefore, scenic spot operators cannot achieve a good return on investment.
The key innovation of our AAVs is that they are designed for multiple use cases with features of high safety, efficiency, and low-cost operations, reflected in our aircraft structure, full redundancy safety design, and fleet management. In terms of aerial tourism, the EHang 216 can achieve stable flights at low altitudes based on our modular structure, and it can be centrally monitored and managed. What's more, it eliminates the high cost of hiring professional pilots. Scenic spots, as our customers, can purchase or lease our AAVs or simply provide infrastructure for qualified operators who can take charge of flight monitoring and operational aspects. EHang provides both AAV sales and UAM operational services to our customers. Our partnership with the Jishou customer serves as an example.
In Q2, our customer not only placed a purchase order for the EHang 216 but also plans to work with us to develop a scenic flight project at Aizhai Wonder. It's a national 5A-level scenic spot in Hunan. This will be achieved through both parties' complementary resources and joint operations. Regarding your second question, as an industry leader, our autonomous technologies are our leading competence in the AAV industry, while other competitors are still at the stage of manual control. In terms of autonomous technologies, we have invested all our efforts from day one, including flight control algorithms, flight lift systems, battery systems, and command and control systems, all integrated into our unmanned aircraft system. With continuous iteration and evolution of these technologies, we are able to stay ahead in the industry. That's the answer to your questions. Thank you.
Thank you so much.
Thank you for your question. We're now going to take our next question. Please stand by. The next question is from Verena Jeng. Please go ahead.
Let me quickly translate here. I have two questions. First, regarding the technology: Are there any differences in the entry barrier across logistics, firefighting, and passenger AAVs? Can these different products share the same production line? And what's the approximate unit level to break even? My second question is on safety: Could we take over the flight if an emergency happens, or if hackers paralyze the system, what can we do to let the AAV land safely? Thank you.
Hi, Verena, this is Richard. Thanks for your question. Let me try to answer your questions. Basically, our 216L, the logistics model, and 216F, the firefighting model, are essentially within what we call the 216 series of products. Our approach has been to first focus on developing a fundamental model for passenger-carrying use, which is the corresponding model, 216S. It requires a large payload and the highest safety level. We then further developed the 216L and the 216F on top of the fundamental model, based on different specific needs. The core modules such as flight control, propulsion, et cetera, are actually the same. The relevant functional parts are tailor-made to suit different needs.
With that, I guess, you probably can tell now the entry barrier was still on the core technology parts, which are shared and require a large amount of time and manpower to be developed. As to the production line, it can also be shared. In respect of breakeven, we can look at them as a whole. To give you a rough idea, it is estimated that annual sales of roughly, to give you a rough range, around 250-300 units of an EH216 series of products could carry the company to breakeven on an adjusted basis, given the current levels of expenses and prices. Regarding your second question.
Basically, our AAV flies by itself along predetermined flight routes in normal situations. In case of an emergency, the AAV can usually deal with the situation by itself. Having said that, if necessary, the ground operational staff who are monitoring the flight can take over control through the ground command and control system. In respect of your hacking question, the connection between the AAV and the command and control system is through a wireless private network and is separated from the public network, and there are high-level cybersecurity protection measures. In case the ground command and control system is hacked, the AAV can still fly by itself to complete the predetermined flight or find the nearest safe area to land. I hope I answered your question. Thank you.
Thank you, Richard. It's very clear. Thank you.
Thank you for your question. There are no further questions. I will now hand the conference back over for closing remarks. Please go ahead.
Thank you, operator, and thank you all for participating in today's call and for your support. We appreciate your interest and look forward to reviewing our progress again next quarter.
That concludes the conference for today. Thank you for participating. You may all disconnect.