In the next 5 years, there will be no models priced below 200,000 yuan (Li Auto 4Q23 conference call minutes).

The following is a summary of the earnings call for Li Auto's fourth quarter of 2023. For an interpretation of the earnings report, please refer to "Li Auto: Being Diligent Rather Than Flamboyant".

1. Review of Key Financial Information:

Although the accounting adjustments have slightly clouded the explosive gross profit margin in the fourth quarter, the actual decrease in unit price is not significant. Implicitly, the normal gross profit margin should still be decent. Clearly indicating the scale effect of 50,000 monthly sales, Li Auto has not only reduced the per-vehicle depreciation cost but also significantly increased bargaining power with suppliers. This has led to a noticeable decrease in variable costs per vehicle, offsetting the price reduction caused by competition.

The real information lies in the guidance for the first quarter, where the climbing speed of unit sales in March is what truly surprises Dolphin Research. With new models just launched, monthly sales in the launch month could exceed 45,000 units. Additionally, the implied slight decrease in unit prices in the first quarter suggests that, despite experiencing another vehicle replacement cycle, Li Auto has smoothly managed to clear old inventory and successfully launch new models.

If sales can climb to over 45,000 units in March, a more affordable L6 model will be launched in April. Coupled with Li Auto's accelerated expansion of its sales network, these pieces of information collectively point to one conclusion: precise product positioning and reliable execution. Li Auto is like a true piece of gold in the crucible, able to withstand the test of fierce market competition.

Rough estimates by Dolphin Research indicate that the current pricing essentially implies a requirement of around 650,000 units in annual sales for Li Auto in 2024, with a neutral expectation of an average of 54,000 units per month. Considering the optimistic information implied in the first-quarter guidance, the company's stock price is likely to trend towards the optimistic side.

2. Detailed Content of the Earnings Call:

2.1. Key Points from Management's Statements:

Delivery Expectations: Estimated total deliveries for Q1 2024 are 100,000-103,000 units, with monthly deliveries in March expected to exceed 50,000 units, reaching 70,000 units by June. The full-year target for 2024 is 800,000 units.

Overseas Deliveries: Overseas deliveries are expected to commence in Q4 2024, with the L7/L9 models leading the way.

Market Share and Competitive Landscape: In the market for new energy vehicles with sales over 200,000 units, the market share is projected to increase from 10.9% in Q1 2023 to 16% in Q4 2023. The top three players are expected to hold nearly 70% of the market share by Q4 2023.

Gross Margin: The gross margin for Q1 2024 is forecasted to be 20%, with a full-year estimate of 20% for 2024.

New Production Capacity: The Beijing Green Smart Factory, completed and operational by the end of 2023, will be used to produce new models of the MEGA+ series of pure electric vehicles.

Vehicle Models:

MEGA: Expected to be launched on March 1, 2024, based on high-voltage pure electric architecture, 5C charging, intelligent space, and the latest smart driving technology.

2024 Li Auto L7/8/9 models: Expected to be delivered in bulk in March 2024.

Other models: Li Auto L6 expected to be launched in Q2 2024, three new pure electric SUVs expected to be released in the second half of 2024, equipped with 5C charging and four-wheel drive. Overall: Expected to launch 8 models in 2024, including 4 extended-range and 4 high-voltage pure electric models.

Intelligent Driving: AD Max 3.0 can achieve full-scenario NOA in over 110 cities nationwide, expected to open NOA citywide without maps in Q2 2024; accumulated mileage reaches 560 million kilometers.

Market Strategy: Future focus on the family market with prices above 200,000, aiming for a 1/3 market share by 2030, no consideration of price reduction in the next 5 years.

Sales Network: 1) Domestic: Added 106 new retail centers in Q4 2023, totaling 474 retail centers as of January 31, 2024, covering 142 cities. Targeting 800 centers by the end of 2024, expanding layout in first and second-tier cities and deepening coverage in third and fourth-tier cities; 2) Overseas: Using direct sales model, already entered the Middle East market, planning to establish after-sales service in Central Asia and the Middle East in H1 2024.

Supercharging Network: Already opened over 340 supercharging stations, with a total charging capacity of 2.81 million kWh; aiming to launch over 2,000 supercharging stations and 700 highway supercharging stations by 2024, covering 70% of national highways and 90% of highways in the four major economic zones.

2.2, Q&A Analyst Q&A

Q: The company previously mentioned exceeding 100,000 units in sales in a month and over 30,000 units per model in a month in 2024. With intense market competition this year, has the guidance changed? When can the goal of 100,000 units in a month be achieved, and what are the vehicle models involved?

The guidance remains unchanged, with the company still aiming to achieve the target of 100,000 units in sales by the end of this year.

Starting in March, deliveries of MEGA and the L series facelift (across the board) are expected to exceed 50,000 units in March and reach 70,000 units by June.

Q: The company previously aimed to be in the top tier of smart driving in 2024. Where does the gap with Huawei and XPeng currently lie? When can it surpass them?

Currently, full-scenario NOA has been launched in 110 cities nationwide, with a 50% increase in daily active users compared to before. The driving mileage of NOA has also increased by 100 million kilometers, helping users with various parking maneuvers over 3 million times and avoiding accidents over 30,000 times. The 24Q2 MAX model will achieve the citywide NOA without maps and can be upgraded to all ADMAX vehicles.

Q: The delivery target for March is close to 50,000, close to last year's peak. Considering the launch of MEGA and the facelift of the L series, how will the rapid delivery of new models be ensured?

Will there be production capacity constraints?

The new product ramp-up has been successful, with over 10,000 deliveries achieved in the first complete month after the launch of L9/L7.

The R&D progress of new vehicle models is in line with the development plan. The manufacturing end has completed capacity planning, factory line construction, worker recruitment, and training ahead of schedule.

Supply capacity strategies and risk analysis have been prepared in advance, along with contingency plans. In terms of planning, demand-supply integration plans have been implemented to ensure timely production and delivery in 2024.

Q: Product Layout: After the launch of the Ideal L6 in April, the group will achieve a breakthrough in covering products of over 250,000. Will Ideal Auto continue to explore lower price ranges for its products? Are there any limitations on hybrid technology in terms of models or prices?

There are no vehicle models priced below 200,000 in the product planning for the next 5 years.

By 2030, covering only the market of households with incomes above 200,000, capturing one-third of the market share in China would result in revenue exceeding trillions. With a strong performance overseas, focusing solely on the market of households with incomes above 200,000 could lead to revenue comparable to that of the global iPhone market. It's a huge opportunity, and there's no need to divert attention elsewhere, just focus on gaining more market share in the above 200,000 market.

Q: In a fiercely competitive automotive market this year, how will pricing be used to achieve a balance between volume and price?

When setting annual sales targets, considering competition and the pace of product launches, we aim to maintain a healthy gross profit margin of over 20%. Depending on market conditions, the gross profit margin will fluctuate between 20% and 25% in different quarters.

Even with some promotional activities in the fourth quarter, the gross profit margin is expected to increase compared to the third quarter.

Q: What are the plans for vehicle models this year?

The Ideal Mega and the 2024 models of the L series will be launched at the event on March 1st. The L6 will be released in the second quarter, followed by three more pure electric SUV models in the second half of the year, all equipped with 5C charging/four-wheel drive as standard. These models will have strong product capabilities, becoming the preferred choice for households in the same price range. 2024 will be an unprecedented year for Ideal Auto with four extended-range and four high-voltage pure electric models by the end of the year, catering to the needs of household users.

Q: In the second half of this year, with three pure electric models, how much of a difference in gross profit margin can be expected compared to extended-range models due to battery prices, 5C charging, and lower initial sales volume?

The overall gross profit margin for EREV and BEV is around 25%. The target gross profit margin was considered during product design to balance profitability and user demand. Taking into account the expected decrease in battery costs starting from 2023 H2, we believe it's the right time to introduce pure electric models.

Q: Thoughts on the latest overseas markets, and the expected sales volume in the next 3-5 years?

Overseas markets are crucial, and we will continue to focus on a direct sales model in these markets, emphasizing the establishment of a robust sales network and comprehensive after-sales service infrastructure. We have successfully established operations in the Middle East and recruited local sales and service teams in Dubai.

We plan to establish dedicated after-sales service in Central Asia and the Middle East by 24H1, and will start overseas deliveries by 24Q4, initially introducing the L7 and L9 models locally.

Q: Will the net profit margin be slightly lower in 24Q1 compared to 4Q23 as we are still selling the 2023 versions of L7, L8, and L9? Will there be a margin recovery in the second quarter with the contribution from a complete delivery quarter of mega? Also, how is the overall profit margin of L6?

The gross profit margin in 24Q1 is around 20%, and the annual gross profit margin is expected to be about 20%. The March Mega and the 4 L series models will make positive contributions, while L6 will have a negative contribution, which is expected to improve with increased sales volume.

Q: What about the capital expenditure related to charging piles? When will the charging stations break even?

We plan to build 2,000 charging piles by the end of 24, including 700 highway supercharging stations to cover 70% of China's highways and 90% of highways in the four major economic zones. The company has sufficient cash reserves and has allocated enough capital for the construction of charging piles. Detailed operational mode evaluations are conducted for each charging station.

Q: How to interpret the company's strategic focus and execution pace in 24? Where is the industry turning point?

We believe that smart electric vehicles will form a concentrated market structure, with the top three brands in 23Q4 holding nearly 70% market share. We will significantly increase R&D investment and continuously enhance our technological capabilities in smart driving, intelligent space, and smart electric vehicles. In 24, we aim to challenge the delivery of 800,000 vehicles and achieve the goal of becoming the top-selling luxury car brand in the Chinese market.

Q: When will be the "iPhone moment" for smart driving? How do you view the current situation of homogeneity and single charging fees for domestic products?

The "iPhone moment" for smart driving is likely to occur in the next 2-3 years, with the mass production of L2 and L3 smart driving and the improvement of AI large model capabilities. We always believe that smart driving should be a standard feature, and currently have no plans for subscriptions or additional charges. This standard feature will increase the number of our smart driving users, help us collect more data, and enhance our algorithm capabilities.

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