Li Auto Inc (NASDAQ: LI; HKEX: 2015) today released its financial report for the third quarter of 2024, ending on September 30: Total revenue was 42.9 billion yuan, a year-on-year increase of 23.6%, a quarter-on-quarter increase of 35.3%. Net income was 2.8 billion yuan, a year-on-year increase of 0.3%, and a quarter-on-quarter increase of 56.2%. Not following the Generally Accepted Accounting Principles in the USA, net income was 3.9 billion yuan, a year-on-year increase of 11.1%, and a quarter-on-quarter increase of 156.2%.

After the financial report was released, Li Auto management held a conference call, attended by Li Xiang, the Chairman and CEO of Li Auto, CFO Li Tie, President Ma Donghui, and Senior Vice President Zou Liangjun, who answered questions from analysts.

The following is the main content of the analyst Q&A session during the conference call:

Morgan Stanley analyst Tim Hsiao: First of all, congratulations to the company for maintaining very strong performance growth this quarter. I have two questions. The first question is about the future growth space of Li Auto's extended-range L series models. I see the management's annual (sales) target guidance is between 50.2 and 0.512 million, which means the average monthly sales of the Li Auto's L series in the fourth quarter can reach 0.053 million. Looking ahead to next year, how much growth space does the management think the Li Auto's L series still has? If so, is this growth space coming from new models, such as the Li Auto L5, existing model upgrades, exports, or penetration into lower-tier cities?

Zou Liangjun: Regarding your first question, we hope that Li Auto's sales growth rate next year can be twice the growth rate of the high-end new energy vehicle (NEV) market (0.2 million RMB).

Morgan Stanley analyst Tim Hsiao: My second question is about Li Auto's intelligent driving system. In September of this year, Li Auto introduced the 'one-click intelligent driving' beta version. When does the management expect to start full-scale deployment? Also, with the arrival of hardware upgrades next year, does Li Auto have the opportunity to further integrate the city NOA function (Navigation on Autopilot) into the new Pro model?

Ma Donghui: In the past ten months, the Li Auto intelligent driving system has completed several major version iterations, from the initial 'light image' to the later 'no image,' and to 'end-to-end.' It can be seen that everyone's recognition and expectations for the Li Auto intelligent driving system are increasing. Regarding the 'one-click intelligent driving' feature you mentioned in your question, we plan to fully deploy it to all AD Max users by the end of this year, before December. At the same time, we will also introduce the 'national ETC non-exit pass-through capability.' We will use the VLM model to identify ETC, whether it's NOA from the city to the highway or NOA from the highway to the city, there will be no exit at ETC toll stations, aiming to provide users with a smoother experience.

Regarding the 'one-click intelligent driving' feature you mentioned in your question, we plan to fully deploy it to all AD Max users by the end of this year, before December. At the same time, we will also introduce the 'national ETC non-exit pass-through capability.' We will use the VLM model to identify ETC, whether it's NOA from the city to the highway or NOA from the highway to the city, there will be no exit at ETC toll stations, aiming to provide users with a smoother experience.

Additionally, regarding whether there is an opportunity for current urban NOA to sink to the Pro model. Because urban NOA requires stronger perception capabilities and higher computing power, the current urban NOA does not support the current Pro model. Please also pay attention to the launch event of our new products for information on future new models.

Deutsche Bank analyst Bin Wang: My first question is about next year's ideal pure electric vehicle models. Could the management share with us the specific launch time of the new models, the price range they belong to, and the expected monthly sales volume by management? I saw online media reports that Idéeal will launch the Idéeal i6 around mid-next year, is this information accurate?

Li Xiang: As for detailed product plans, we will share them with everyone at the appropriate time through official product launch events. Because confidentiality is very important for such new products. Overall, we are very confident in the subsequent pure electric vehicle models, just as our extended range L series performs in the high-end new energy vehicle market, we will strive to make Idéeal's pure electric SUVs among the top tier of the high-end pure electric market.

Deutsche Bank analyst Bin Wang: My second question is, does the company have CEO stock incentives this quarter? In previous meetings, management mentioned that once sales exceed 0.5 million, there will be incentives. The current annual sales have not yet reached 0.5 million, so approximately how much will the stock incentive expenses be for this quarter? How much will be in the fourth quarter? Also, what are the principles for dividing expense time periods?

Li Tie: Regarding the CEO stock incentive you mentioned. As of September 30, the company expects sales for the first three quarters to meet the initial stock incentive target, i.e., sales exceeding 0.5 million within 12 months. Therefore, we have basically confirmed a stock incentive expense of 0.593 billion RMB in the third quarter. An additional 42 million RMB will be distributed in the fourth quarter. The timing of each batch of stock incentive distribution depends on whether the '0.5 million sales' target is achieved, with the incentive expense being the same each time.

Goldman Sachs analyst Tina Hou: First of all, congratulations on the very good performance this quarter, especially the outstanding performance of the overall vehicle gross margin.

I have two questions. The first question is about Idéeal's sales policy in the fourth quarter. Generally, in the fourth quarter, sales policies of various car companies are adjusted, so I would like to ask the management team about the company's plans for the fourth-quarter sales policy. I have noticed that the sales guidance given by management for the fourth quarter may only increase by approximately 0.01 million to 0.02 million vehicles compared to the third quarter; however, the increase from the third to the fourth quarter last year was in the range of 26,000 to 27,000 vehicles. This year, we actually have an additional model, but the overall sales guidance seems conservative. I would like to ask the management team how this is considered. Will this year's sales policy not subsidize as much as last year?

Zou Liangjun: First of all, in the current highly competitive market environment, Idéeal's L-series sales remain strong. This is mainly due to the increased brand awareness of Idéeal, achieving delivery of 1 million vehicles, and the rapid advancement in autonomous driving capabilities. We are very confident in the sales for the first quarter.

Since the beginning of this year, although the market competition has been very intense, Li Auto Inc.'s market share has been continuously increasing. In the third quarter, our market share in the new energy autos market with prices of 0.2 million RMB and above reached 17.3%, hitting a historical high. At the same time, since the launch of Li ONE, the monthly delivery volume has exceeded 25,000 vehicles, with a total delivery volume exceeding 139,000 vehicles. Among the new cars launched this year, Li ONE has been the best-selling model.

Regarding the sales network. In the second half of this year, we initiated a new round of marketing reforms, granting more operational autonomy to each sales region. The marketing heads of each province will be responsible for overall operation, rather than just sales as in the past. With operational autonomy, the heads of each province can conduct region-specific sales and marketing activities based on local market conditions, further enhancing brand awareness and market share. From a regional perspective, in response to the competitive landscape in different provinces, we will formulate targeted regional sales policies based on local conditions.

Goldman Sachs analyst Tina Hou: My second question is related to the company's sales network. So far this year, it seems that li auto inc's number of stores hasn't increased much. By the end of this year and in 2025, does the management have specific expansion plans?

Zou Liangjun: We expect that by the end of this year, li auto inc's retail store count will exceed 500. We have implemented a key channel adjustment measure this year, gradually replacing poorly performing shopping center stores in the sales network with flagship stores and AutoPark center stores. The proportion of our center stores has increased from over 24% at the end of 2023 to over 40% by the end of this year; in the Chinese market, our total booth count is expected to increase from over 2600 at the end of 2023 to over 3600 by the end of 2024. Additionally, we are expanding the sales and service network coverage of li auto inc in third-tier cities and some key fourth and fifth-tier cities. As for specific store targets, we will share them with everyone after the release of next year's first-quarter financial report.

CICC analyst Jing Chen: I have two questions. First, just as Mr. Li (Li Xiang) mentioned earlier, with more plug-in hybrid players entering the market, competition will intensify. Looking ahead to next year, it will also mark two years since the release of the Li ONE series. In terms of the entire hybrid product range of Li Auto Inc, what improvements and iterations does the management expect to make? Especially in terms of technology, what rough directions does the management believe can be further enhanced?

Li Xiang: I believe that competition in the autos industry includes comprehensive operational capability competition, encompassing technology, products, supply chain, sales, and services. Plug-in hybrids are just one important aspect of the technology, but not the only one. The Li ONE series is still in its 'prime youth' stage for the next one to two years. In addition, after consumers purchase Li ONE autos, we will continue to update features, enhance experiences, and continuously increase the product value. In terms of the integration capability of software and hardware experiences, Li Auto Inc should be the best-performing in the industry.

Looking ahead to the next three to five years, I believe the biggest variable will come from artificial intelligence, including 'intelligent driving based on true artificial intelligence' and 'intelligent assistants based on artificial intelligence.' They will bring consumers a completely different experience from today, marking the true beginning of a qualitative change.

Lastly, I would also like to remind everyone that as of 2024, the most consumer-recognized new car in the global market is the Li ONE from Li Auto Inc. This is a solid result on the sales end. In the six months since its release, the cumulative delivery volume of Li ONE has exceeded 139,000 units, and the production capacity clearly cannot meet the demand for orders. The factory needs to achieve expanded production during the 2025 Chinese New Year period to better meet the needs of more consumers.

Zhongjin analyst Jing Chen: My second question is about the overseas market. Does Li Auto Inc. currently have a more aggressive strategy for the overseas market? If so, what is the consideration behind this strategic adjustment? Could the management please introduce to us briefly whether the company currently has a rough plan for the overseas market internally? This includes the entry into some key markets, the sales channel strategy, and whether the overseas market will become an important source of sales growth for Li Auto Inc. by 2025.

Zou Liangjun: For Li Auto Inc., the importance of the overseas market is beyond doubt. Our overseas market strategy is different from other automotive companies. As of now, we have established service networks in multiple countries and regions, including Central Asia such as Kazakhstan. These service networks effectively help us expand Li Auto Inc.'s market share in overseas markets.

As for the selection of overseas sales markets, the Middle East and Central Asia will be the first target sales regions we focus on. Based on this, we will continue to explore and evaluate all markets with high growth potential, continuously expanding Li Auto Inc.'s sales network globally. However, we are currently not considering entering the markets in Western Europe and North America.

BofA Securities analyst Ming Hsun Lee: I have two questions. Firstly, just a few days ago, Li Auto Inc. officially pushed the 'end-to-end + VLM dual-system intelligent driving solution' to all AD Max users. From the user experience perspective, what is the biggest progress in 'end-to-end' NOA compared to the past? Additionally, has there been a significant change in the sales proportion of the AD Max version since the third quarter of this year?

Ma Donghui: First of all, after the push of the 'end-to-end + VLM dual-system intelligent driving solution', we believe that the entire concept of intelligent driving will shift from 'function' to 'capability'. In other words, it will transform from the 'city NOA' and 'highway NOA' functions into a true, supervised intelligent driving capability. This also signifies a shift from rule-based algorithms to true AI large models.

For users, this brings quite a lot of value. Let me give two examples. Firstly, the 'takeover mileage', which we call the 'MPI' (average takeover mileage), will become longer, and with the increase in model parameters and training data volume, the MPI mileage will increase significantly. This means that enterprises with high-quality training data will have an absolute advantage in future competition. The second point is safety. The overall safety mileage, which we call 'MPa', will also see a substantial increase. Compared to human drivers, we predict that this 'end-to-end version' will further increase safety mileage, reaching 3 to 5 times the safety mileage of human drivers. Additionally, with the improvement in large model capabilities, our safety in AEB (automatic emergency braking) and AES (automatic emergency steering) will also see significant improvements, and the number of major accidents will greatly decrease.

The impact of AD Max on overall sales is actually very significant. In the AD Max versions priced above 0.3 million RMB, our sales have increased to a certain level; the proportion of AD Max in Li Auto Inc.'s L6 sales has also been continuously increasing.

BofA Securities analyst Ming Hsun Lee: My second question is about Li Auto Inc.'s charging stations. Just now, CEO Li (Li Xiang) mentioned that Li Auto Inc. currently has 1,000 charging stations. I would like to ask the management, approximately how many charging stations do we expect to have by the end of next year? Additionally, how many of the current Li Auto Inc. charging stations are self-built, and how many are from third parties? What is the company's capital expenditure plan for charging stations next year? Finally, how is the usage rate of Li Auto Inc.'s charging stations currently? Because I see that the current ownership of Li Auto Inc.'s pure electric vehicle MEGA is relatively low. Are many of Li Auto Inc.'s charging stations used by vehicles from other brands? In this case, from a gross margin perspective, the increase in charging stations will not have a negative impact on the company's gross margin. Is this statement accurate?

Zou Liangjun: Our plan is to establish the industry's largest OEM charging network. Before the launch of our new electric vehicle models, we hope to build more charging stations in key cities, the number of which should exceed Tesla.

Using the launch of our new electric vehicle models as a time point, our goal is to build and operate over 2,000 charging stations, with this number reaching 4,000 by the end of 2025. Currently, Ideal Car's super charging network covers 9 national highways, with a total mileage exceeding 0.054 million kilometers, achieving a coverage rate of 63%. By the end of 2025, we will construct over 1,200 super charging stations along the highways, covering 90% of the national roads. In addition to highway and urban coverage, we will selectively cover medium to long-distance self-driving routes to meet users' family travel needs. For example, the super charging station we built at Mount Everest will be operational in October this year; next April, we will achieve end-to-end coverage of the super charging network on National Highway 318.

Regarding the cooperative super charging stations in cities. As of now, we have built over 500 cooperative super charging stations, and it is expected that this number will exceed 3,000 by the end of next year.

HSBC analyst Yuqian Ding: My first question is to ask the management, whether the brand concentration in the price range above 0.2 million RMB is similar to the direction discussed by the management at the beginning of the year? In the process of industry consolidation, how does the management think about coping with attacks from high-end models of all brands and other new players with a technological background?

Li Xiang: Before we introduce a pure electric SUV product line, Ideal Car's market share in NEVs above 0.2 million RMB is increasing every quarter, reaching over 17% in the third quarter.

In my opinion, for a long time, regardless of which brand enters the market, everyone will face the same fundamental challenge, which is whether each product we offer can provide leading product value in its price range for users. This is the core of everything. In the long run, we are still very confident. We believe that through Ideal Car's extended range and pure electric product line, Ideal Car has the ability to continuously gain more market share. Our long-term goal is to capture over 25% of the market share in the NEV market above 0.2 million RMB.

HSBC analyst Yuqian Ding: My second question is, I have observed a gradual increase in the supply of new models in the medium to large size home-use large SUV and MPV markets. Does the management believe that the boundaries of family users may have been partially reached? What are the blue ocean opportunities that the management is bullish on and subdivided?

Li Xiang: I think Ideal Car's exploration of the entire family market is just beginning, especially after artificial intelligence has brought changes to autonomous driving and cabin experience, the space for family market imagination and creativity will become stronger. I believe we are not in a hurry to explore more markets but should make this market better.

On the other hand, from a pure electric perspective, many people wonder if electric products priced above 0.3 million RMB will be difficult to sell. However, the fact is that for electric products priced above 0.3 million, if one wants to find products with product strength, such as Li Auto Inc L7, L8, L9, carefully consider, the market actually does not have such products. Therefore, many times we say that whether from the perspective of artificial intelligence or from the perspective of electric vehicles beyond extended range, these medium to large-sized SUVs actually have more market space to explore. So we are not in a rush to explore the market, 'we cannot hold a golden rice bowl and ask for food.'

Citigroup Analyst: I have two questions. My first question is about autonomous driving. Could the management share with us the current progress and future structure of autonomous driving? Looking ahead from a medium to long-term perspective, will the technological iteration of autonomous driving slow down? If it slows down, will it lead to a narrowing of tech differentiation among companies?

Ma Donghui: Currently, Li Auto Inc is conducting technological research and product iteration with a focus on 'supervised intelligent driving,' creating a product experience without breakpoints throughout 'spot to spot.' At the same time, we believe that in terms of intelligent driving, product and technological innovation are also needed in human-computer interaction. Currently, we have started user testing, and after approval, we will gradually push it to all users.

Looking ahead, we have also launched L4 level self-driving simulations. On top of the current technological roadmap, we will study a more robust VLM model on the vehicle side and a cloud-based vision model combined with a reinforcement learning system. Additionally, we will continue to increase our investment in intelligent driving infrastructure to maintain our leadership in training power and intelligent training mileage.

Regarding the question of each company's autonomous driving capabilities, we do not believe that the gap will narrow. Because in the long run, autonomous driving requires significant investment in vehicle-side computing power, cloud computing power, and training data resources. The future demand for large model algorithms in autonomous driving will only increase. We believe that the gap will actually widen.

Citigroup Analyst: My second question is about future cost reduction and efficiency improvement efforts. What are the management's views on this? With the increase in sales, what are the main factors for the company's future cost reduction? Such as procurement, technology, or depreciation, etc.

Ma Donghui: Regarding cost reduction and efficiency improvement. We will search for opportunities from end to end, throughout the entire chain, including the mentioned technological innovation, procurement quality, waste reduction, increasing our and partners' production capacity utilization rate, and even more efficient logistics and distribution methods. All of these require very detailed operational strategies.

Expanding further. First, we believe that technological innovation is crucial for cost reduction. For example, extended range includes electric drive, system integration, and central control unit integration. This not only enhances product strength but also improves our cost competitiveness; on the supply side, we have established a platform for collaborative innovation, allowing our partners to intervene earlier, seeking better design and process solutions and cost reduction opportunities together; in terms of partnerships, we always advocate a 'win-win' concept, which is also beneficial for the long-term development of the industry; furthermore, we will create popular products through component platformization; in terms of market share, we will focus more and gather volume, enhance production capacity utilization, thus bringing cost optimization opportunities.

At the same time, we have always been utilizing digitalization and intelligence, applying them to li auto inc's own factories, while empowering partners to reduce waste in the manufacturing process, improve the utilization rate of manufacturing equipment, and ultimately achieve cost optimization. (End)