Auto released its second quarter 2020 results as of June 30 today, with total revenue of 3718.9 million yuan (about 524.4 million U.S. dollars), up 146.5% from the second quarter of 2019 and 171.1% from the first quarter of 2020. The net loss was RMB 1176.7 million (about US $166.5 million), down 64.2% year-on-year and 30.4% month on month. Not according to non GAAP, the adjusted net loss was RMB 1134.4 million (about US $160.1 million), down 64.6% year-on-year and 31.8% month on month.
after the release of the financial report, Li Bin, founder, chairman and CEO of Weilai, Feng Wei, CFO, and Qu Yu, vice president of finance, attended the subsequent conference call to interpret the financial report and answer questions from analysts.
Morgan Stanley analyst Tim Hsiao: good management, congratulations on the company’s strong performance. Thank you for accepting my question. I have two questions. The first question I would like to ask is the gross profit margin of the second quarter, because our results have exceeded the previous guidance expectations. Can you further explain the difference in the gross margin between es8 and ES6? Can ES6 achieve the same gross margin as es8? What is the contribution of ec6?
the second problem is related to R & D expenditure. I feel that our R & D expenditure seems to be well controlled. Despite the launch of new models, the R & D expenditure is still between 500 million and 600 million. So will that be the level of normalization? Because William (Li Bin) also mentioned the investment in vehicle development and automatic driving technology, what is the proportion of R & D expenditure on vehicle development? What is the R & D expenditure on autonomous driving or other technologies?
Qu Yu: on the first issue, the gross profit margin of es8 is higher than that of ES6. We will continue to improve the gross profit margin of the two models in the future, but we have not subdivided the gross profit margin of each model, so we have no more details.
Li Bin: I’ll answer the second question, which is investment in research and development. Generally speaking, we now guarantee that our R & D investment is within 3 billion RMB per year, which is basically a guarantee. Of course, this includes the salary of all the staff, including some expenses for other places we have to pay with our supply chain partners. Generally speaking, the R & D investment related to the car is higher, which is directly related to the model.
of course, just now I also mentioned that we will increase the investment in AD (automatic driving), which is already included in our overall R & D investment. We now have an ad team of more than 200 people. It has already occupied a conventional research and development cost, but in the next step, we will increase some investment around the next generation of automatic driving technology. On the whole, our R & D spending is about 500 million to 600 million a quarter. Of course, in some quarters, we will increase according to the development progress of models.
Credit Suisse analyst bin Wang: I have three questions about autonomous driving. First, it was said that Weilai app will launch two new functions: automatic navigation, driving, NOP and vehicle automatic calling. When will these two functions be released? Is it possible to launch them this year? Second, at present, users need to pay 39000 RMB to get the automatic driving software package. How high is the penetration rate of this service? How many users of 100 cars will buy 39000 software packages? What is the trend in the future? Third, it is reported that Weilai will cooperate with Mobileye to develop level 4 autopilot. What is the time point for the launch of level 4 autopilot?
Li Bin: Thank you for your question. Our NOP function is now under strict testing, and we will deliver it to users within this year. However, due to hardware limitations, we are not as powerful as Tesla. However, our calling function is mainly a function of getting in and out of parking spaces. I don’t want to mislead users. Our calling function is not up to the level of Tesla for the time being. But our NOP function, according to the latest test, combined with high-definition map, it still performs well. We are also stepping up testing and will definitely deliver it to users within this year.
the second question is about the penetration rate of our NiO pilot, because about 10000 cars in our first batch of original versions included this function. Therefore, our overall permeability is greatly improved. Of course, now, under the normal sales situation, it is about 25%. At present, it is almost the same proportion. This year, we also launched a small package of about 10000 RMB, including some entry-level functions. The proportion of this service is still good.
the third question is about the development of our next generation automatic driving technology, which is called NiO Technology 2.0 development. We are stepping up the development, but it is too early to say the specific technical route today. But I can say yes, we have set a very high standard. We believe that our automatic driving technology is very advanced in mass production vehicles. As a matter of fact, if we are going to carry out the technology of mobile eye in the whole world in 2018, we will be the first to carry out the technology of mobile eye in 2018. Our peers are about a year behind us. So when we look at the capacity of our mass production vehicle on automatic driving, our company’s experience in this field and the capability of the whole automatic driving system have been proved successfully. Therefore, we will definitely set a higher standard for the next generation of automatic driving technology, and we will disclose it to you when appropriate.
in addition, I would like to say that we will not define our autopilot technology in terms of level 3 or level 4. We pay more attention to two benefits to users. One is how much time users can spend in the car. This is a very important point for us. The second is how much accident probability can be reduced compared with human driving. These two points are two very core indicators for our evaluation of autopilot technology. This is quite different from the logic of level 3 or level 4 currently used.
bin Wang: can I add another question? We can see from the website that the company intends to enter Germany later this year. Is this the global strategy of Weilai or is it limited to China? What is the company’s future overseas expansion plan?
Li Bin: of course, Weilai is different from other Chinese companies since its establishment. We are a global company. You know, even in our toughest times last year, we kept our offices in Germany, the UK and Silicon Valley running normally. This year, of course, the epidemic did not affect the development of our global business. As a matter of fact, we are really doing a very detailed preliminary research and preparation for the overseas market, including product preparation, team preparation and detailed market entry plan. But what I can say is that this year is definitely not the right time for us to know. But now we are carefully preparing these things. Of course, there are many overseas media, media outside China, who are very concerned about our products. In fact, we have recently seen that some very well-known automobile media in Europe, including those in the United States, have given us very high evaluations after testing our cars. Step by step, we are building our ability to expand the global market. I also hope to be patient. The situation in the world this year is not so normal, but we must make full preparations.
CICC analyst Lei Wang: I have three financial issues. The first problem is related to gross profit margin. William’s expectation is that the gross profit margin (GPM) of production will be about 10% by the end of this year. But considering the data of the second quarter, is the current gross profit rate target updated?
Qu Yu: let me ask and answer the first question. Overall, we expect our vehicle prices to remain relatively stable in the third and fourth quarters. In the case of batteries, we expect there is still room for cost reduction. With other savings, I think the target of 10% gross profit margin for vehicles can be achieved. At present, we do not intend to adjust our gross margin expectations. For the second half of the year, we still maintain double-digit expectations.
Li Bin: Yes, of course, we can still see that our gross profit margin continues to increase. We are moving forward at our own pace. From all aspects, there are still opportunities for improvement. So, of course, as you all know, the guidance we have given in this respect, just as we did last quarter, we are certainly willing to look at this matter from a more cautious perspective.
Lei Wang: my second question is about operating cash flow. I think the main driving force behind this should be optimized working capital. Can you explain a little bit?
Qu Yu: for positive cash flow, generally speaking, there are several reasons for positive cash flow. First of all, we kept the operating loss at a low level; secondly, we renegotiated the credit term and payment method with the suppliers, for example, we asked the suppliers to postpone the credit period from 60 days to 90 days, and then convinced them to accept bank bills instead of cash when purchasing payment; thirdly, the direct selling mode mentioned by Li Bin We can pay the supplier in cash before we receive it. So, add up, our cash flow in the second quarter is positive.
Lei Wang: I think the payment period is a very positive signal that the supplier has great confidence in you. My third and last question. We mentioned that the monthly capacity is between 4500 and 5000 units. But Steven just mentioned that the delivery of the next quarter is expected to be 11000 units. Why is there such a gap between capacity and delivery?
Feng Wei: first of all, we will increase the production capacity of Weilai factory at the end of August. But in July and August, our monthly capacity was still below 4000 units. So it limits our delivery in the third quarter. Why should we increase the production capacity to 4500 or even 5000 units? This is because we want to prepare for delivery in the fourth quarter.
Li Bin: Yes, I would like to add that the reason why we are increasing production capacity is that our demand is still very strong. If I go to see our es8, I often get feedback from some friends recently about whether I can speed up my car. It is true that many users have to wait a long time to mention es8. In fact, we have a lot of backlog of orders. Of course, we can see that ec6 starts to deliver in late September, and its production scheduling also needs some time. Therefore, if the orders in the fourth quarter are accumulated to that time, plus the previous backlog, the delivery pressure in the fourth quarter is still relatively large. Therefore, in general, at the beginning of the line month, the production capacity of the whole supply chain should be prepared mainly for ec6 production scheduling and better meeting the four seasons