Profit margin expectations continue to improve, is this an investment opportunity for LeapMotor? (LeapMotor 3Q conference call notes)

1. Management Discussion

• Delivery Status: In the third quarter, 44,325 units were delivered, a YoY increase of 24.5%.
• Product Iteration: The first global model, C10, built with LEAP3.0 technology, made its debut at the Munich Motor Show. Plans to launch 5 models within two years.
• Gross Margin: Gross margin turned positive this quarter, reaching 1.2%. Gross margin is expected to be 5-10% next year.

2. Q&A

1. What is the potential for improving Q4 gross margin?

Improvements in technology, cost reduction, and decreased expenses can lead to an improvement in gross margin. The impact on gross margin from passing on benefits to consumers is manageable.

2. What is the plan for channel optimization?

Continued optimization of channels, continuing the 1+n model, with one 4S dealership as the center for delivery, sales, and service, supplemented by city showrooms. Selecting excellent dealers, evenly distributed, covering third and fourth-tier cities. Increase the number of stores by 20% based on this year's foundation.

3. What is the ratio of pure electric to extended range vehicles?

Adjust production and sales volume according to customer demand. 60% pure electric, 40% extended range for both C01 and C11. The reputation of C11 as a pure electric vehicle has resulted in higher sales, and the sales of extended range vehicles may become closer to pure electric vehicles. With the gradual maturity and cost reduction of fast charging technology for 800V high-voltage batteries, the ultimate future direction is pure electric vehicles. The main direction for the next 3-5 years is pure electric.

4. How to balance gross margin pursuit and sales volume?

Sales volume is the most important. If there is demand, further benefits will be provided. Technological innovation reduces costs while benefiting customers, while maintaining gross margin at a relatively reasonable level.

5. What is the direction and expectation for R&D investment?

Increase R&D personnel. The investment direction is intelligent driving and intelligent cockpit. Expect breakthroughs and innovative ideas in performance, functionality, algorithms, and intelligent driving in the fourth quarter or next year. Investment is based on rational growth on the basis of improving efficiency.

6. How does battery pricing help gross margin?

Internally, the calculation is based on the price of stripped-down batteries to see the cost reduction effect. The gross margin in September was close to 5%.

7. What are the plans for product cycles?

In the fourth quarter, C01, C11 (pure electric and extended range), and T03 are expected to bring sales, with monthly sales of 18,000 units or higher. C10 is expected to achieve pre-sales by the end of the year, with technological advancements such as lidar, advanced intelligent driving, and the use of the Qualcomm 8295 chip, which is three times more powerful than the 8155 chip, as well as LEAP3.0 battery and motor architecture. Benchmarking against the best products in terms of cabin, intelligent driving, and user experience, integrating Leapmotor's capabilities to bring about qualitative changes. In June, C16 was launched, and both C10 and C16 (pure electric and extended range) were simultaneously released. C16 is the first platform to use 800V high-voltage and 2.4C fast charging.

8. When will advanced features be launched and how many cities will have access?C10 Advanced Intelligent Driving will be released in the first quarter of next year, with a high-speed and high-precision map navigation version, and the urban NOA will be launched in another quarter.

8. What improvements contributed to the positive gross margin in the third quarter?

On the material side: We started a cost reduction initiative in September last year, and made innovations in the components and design of C01 and C11. We negotiated cost reductions with suppliers based on incremental improvements, and the price reduction of batteries resulted in a cost reduction of over 30,000 yuan.

On the manufacturing side: We optimized processes to improve efficiency, resulting in a cost reduction of over 1,000 yuan.

We achieved a positive gross margin while reducing the selling price.

9. The T series accounted for a significant proportion in the third quarter, and the ASP remained the same as the second quarter. Was the increase in ASP due to the improved sales pace of SKUs or other sources of revenue?

The T03 accounted for 19% in the third quarter, and the rapid increase in C11 and C01 led to an increase in ASP.

10. Is the gross margin target conservative in the cost optimization process?

Sales volume is the most important factor for LEAP. We balance the relationship between sales volume and gross margin, and make judgments based on the competitive situation. Our ability to continuously optimize costs is excellent, with a cost reduction cycle of every 6 months.

11. Will fluctuations in battery prices eat into the gross margin? How is the gross margin planned?

The price of lithium carbonate is expected to be lower, and other materials are also decreasing. Overcapacity and the expansion of battery scale have led to a decrease in battery prices. A further 10-15% reduction in lithium iron phosphate is also possible.

12. What is the outlook for the Chinese new energy market next year, and how will you achieve the goal of monthly sales of 30,000 units?

There is no problem reaching 9 million units this year, and the growth rate has been consistently high. There will be a significant increase next year.

12. Cash reserves? Capital expenditure?

11.6 billion yuan. With the increase in sales, every additional 10,000 units can generate cash flow equivalent to 5 months of dealer credit, resulting in a net increase of 4 billion yuan in cash flow. As long as sales volume increases, cash flow will continue to grow. Although there was a loss in the third quarter, there was still 1 billion yuan in cash flow, which is relatively optimistic. This quarter's cash flow was 380 million yuan, which is the same as last year. This is mainly due to factory construction and research and development investment. Factory construction can be financed through project loans.