Li Auto (LI) Q3 2023 Earnings Call Transcript

Li Auto (LI -0.02%)
Q3 2023 Earnings Call
Nov 09, 2023, 7:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Hello, ladies and gentlemen. Thank you for standing by for Li Auto’s third-quarter 2023 earnings conference call. [Operator instructions] At this time, today’s conference call is being recorded. I will now turn the call over to your host, Kobe Wang, the head of capital markets of Li Auto.

Please go ahead, Kobe.

Kobe Wang — Head of Capital Markets

Thank you, operator. Good evening, and good morning, everyone. Welcome to the Li Auto’s third-quarter 2023 earnings conference call. The company’s financial and operating results were published in a press release earlier today and are posted on the company’s IR website.

On today’s call, we will have our Chairman and CEO, Mr. Xiang Li; and our CFO, Mr. Johnny Tie Li, begin with prepared remarks. Our president, Mr.

Donghui Ma; and the senior VP, Mr. James Liangjun Zou, will join for the Q&A discussion. Before we continue, please be reminded that today’s discussion will contain forward-looking statements made as 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 different from the views expressed today. Further information regarding risks and uncertainties is included in certain company filings with the U.S. SEC and the Hong Kong Stock Exchange.

The company doesn’t assume any obligation to update any forward-looking statements except as required under applicable law. Please also note that Li Auto’s earnings price release price and this conference call include discussion of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. Please refer to Li Auto’s disclosure documents on the IR section of our website, which contains a reconciliation of unaudited non-GAAP measures to comparable GAAP measure. Our CEO will start his remarks in Chinese.

There will be English translation after he finished all his remarks. With that, I will now turn the call over to our CEO, Mr. Xiang Li. Please go ahead.

Xiang Li — Founder, Chairman, and Chief Executive Officer

[Foreign language] Hello, everyone, and welcome to today’s earnings conference call. In the third quarter of 2023, despite the intense competition in China’s NEV market, we maintained strong growth momentum propelled by our compelling product lineup and strong execution. Total deliveries for the quarter surpassed 105,000 vehicles, almost 4 times the volume for the same period last year, setting another new quarterly delivery record. By the end of September, we have delivered our 500,000 Li Auto vehicles, becoming the fastest Chinese emerging new automaker to reach this benchmark.

Moreover, in October, Li Auto achieved another new milestone with over 40,000 monthly deliveries. According to the insurance registration data of China Automotive Technology and Research Center, Li L9 maintained its position as the full-size SUV sales champion during the quarter, while L7 and L8 continue to occupy the first and second spots in the large SUV market, respectively. We remain one of the top 3 NAV brands priced over RMB 200,000 in China, while our market share continued to grow, reaching 15.4% in NAV brands priced over RMB 200,000 in China compared with 10.9% in the first quarter and 13.7% in the second quarter. We believe that our L Series’ robust growth momentum, together with deliveries of our upcoming BEV models next year will enable us to accelerate the large-scale transition from traditional ICE vehicles in 2024.

Turning over to our financial performance. Our rapid scale growth has driven continued cost reduction, resulting in steady improvements across multiple financial metrics. Total revenues for the third quarter were RMB 34.68 billion, up 271.2% year over year. Our net income and free cash flow increased to RMB 2.81 billion and RMB 13.22 billion, respectively, both heading new historical highs.

Notably, our cash position reached RMB 88.52 billion as of the end of the third quarter. Our healthy operations reaffirms our strong operational capabilities, underpinning our long-term firm commitment to R&D. Our market-leading charging capability for BEVs is just one great example of our achievements made through R&D investments. With respect to production, in October, our Changzhou manufacturing base completed its capacity expansion and is now well-positioned for its production increase in Q4.

In terms of supply chain management, we continue to break through the component supply chain bottleneck by the enhanced supply chain management strategies, improve processes, and more efficient collaboration with our suppliers. We expect total delivery in the fourth quarter to be between 125,000 to 128,000 units. Now I would like to talk about Li Mega. Li Mega can gain up to 500 kilometers of driving range with a 12-minute charge and features an industry-leading silhouette.

It is — its market reception has exceeded our expectations. Li Mega’s extremely large interior space meets the travel needs of large Chinese families. At the same time, this unique body style of silhouette are intended to reach the perfect balance between interior space and energy consumption. It is the most aerodynamic NPV in the world with a drag coefficient of only 0.15.

Based on our 800-volt BEV platform, Mega is capable of 5G charging with a peak charging power exceeding 520 kilowatts higher than any other passenger vehicle in production in the world. Li Mega is targeted for launch in December 2023. Showroom vehicles are scheduled for our retail stores in January 2024, and the lease will commence in February. We will share details about Mega during our product launch event this December.

In the meantime, we have been making progress with our 5C supercharging network expansion. To date, we have built and started operating 130 supercharged stations along highways nationwide. We expect to establish 300 highway supercharging stations by the end of this year, covering four major economic zones, including the Beijing-Tianjin-Hubei economic belt, the Yangtze River Delta region, and the Greater Bay Area, and Chengdu-Chongqing economic belt. Going forward, we will further accelerate the rollout to increase nationwide highway coverage while also actively building urban supercharging stations.

They are greatly improving users’ energy replenishment experiences across all scenarios. Moving on to autonomous driving. Our city NOA and on our AD Max platform continue to progress smoothly. We expect to push the official version of AD Max 3.0 by the end of this year with full scenario NOA function.

Meanwhile, the AD Pro 3.0 official version will be released in the first half of next year. By then, part of AD Max’s algorithm capability will also be available on AD Pro. We’re confident that Li Auto will become a market-proven, first-year player in the autonomous driving market in the first half of next year. Turning to the development of our direct sales and servicing efforts.

As of October 31, 2023, we have 372 retail stores in 133 cities. Moving to the fourth quarter, we will continue to accelerate our network expansion aiming to cover over 400 stores across 140 cities nationwide, further increasing Li Auto’s market share in China’s new energy automotive market. Last but not least, I would like to share some details regarding our accomplishments in ESG. In September, our company has upgraded to the highest AAA rating by MSCI ESG Research, making Li Auto the first Chinese automaker ever to receive this rating.

The rating validates our steadfast efforts across corporate governance, product safety and quality, clean tech development, and organization and talent among other areas. Moving forward, we’ll continue to uphold our value proposition of providing outstanding products and services that exceed our family users’ needs as we constantly push the limit of growth. With that, I will turn it over to our CFO, Johnny, for a closer look at our financial performance.

Johnny Tie Li — Chief Financial Officer

Thank you, Xiang. Hello, everyone. I will now walk you through some of our 2023 third-quarter financials. Due to time constraints, I will address financial highlights and encourage you to refer to our earnings press release for further details.

Our total revenues in the third quarter were RMB 34.68 billion or US$4.75 billion, up 271.2% year over year and 21% quarter over quarter. This included revenue from vehicle sales of RMB 3.62 billion or US$4.61 billion, up 271.6% year over year and 20.2% quarter over quarter, mainly driven by increased vehicle deliveries. Revenue from sales and services — revenue from other sales and services were RMB 1.06 billion or US$145.7 million in the third quarter, growing 258.7% year over year and 56.2% quarter over quarter. The increase was mainly due to the increased sales of accessories and provision of services in line with higher accumulated vehicle sales as well as increased sales of charging stores in line with higher vehicle deliveries.

Cost of sales in the third quarter was RMB 27.03 billion or US$3.71 billion, up 231.3% year over year and 20.6% quarter over quarter. Our gross profit in the third quarter was RMB 7.62 billion or US$1.05 billion, growing 546.7% year over year and 22.6% quarter over quarter. Vehicle margin in the third quarter was 21.2% compared with 12% in the same period last year and 21% in the prior quarter. Excluding the impact of inventory provision on losses on purchase commitments related to Li 1 in the third quarter of 2022, the vehicle margin remained stable over the third quarter of 2022.

Gross margin in the third quarter was 22% compared with 12.7% in the same period last year and 21.8% in the last quarter. Operating expenses in the third quarter were RMB 5.31 billion or US$727.1 million, growing 2% year over year and 15.1% quarter over quarter. R&D expenses in the third quarter were RMB 2.2 billion or US$386.1 million, up 56.1% year over year and 16.1% quarter over quarter, primarily driven by increased employee compensation as a result of our growing number of staff as well as increased expenses to support our product portfolio expansion and technology advancements. SG&A expenses in the third quarter were RMB 2.54 billion or US$348.7 million, up 68.8% year over year and 10.2% quarter over quarter, primarily driven by increased employee compensation as a result of our growing number of stock as well as increased rental expenses associated with our sales and service servicing network expansion.

Income from operations in the third quarter was RMB 2.34 billion or US$320.6 million, compared with RMB 2.13 billion loss from operations in the same period last year and growing 43.9% from RMB 1.63 billion income from operations in the last quarter. Net income in the third quarter was RMB 2.81 billion or US$385.5 million compared with RMB 1.65 billion net loss in the same period last year, an increasing 21.8% from RMB 2.31 billion net income in the second quarter of this year. And now turning to our balance sheet and cash flow. Our cash position remained strong and stood at RMB 88.52 billion or US$12.3 billion as of September 30, 2023.

Net cash provided by operating activities in the third quarter was RMB 14.51 billion or US$1.99 billion. Free cash flow was RMB 13.22 or US$1.81 billion in the third quarter. And now for our business outlook. For the fourth quarter of 2023, the company expects the deliveries to be between 125,000 and 128,000 vehicles, representing an increase of 169.9% to 176.3% from the fourth quarter of 2022.

The company also expects fourth-quarter total revenues to be between RMB 38.46 billion and RMB 39.38 billion, representing an increase of 117.9% to 123.1% from the fourth quarter of last year. This business outlook reflects the company’s current and preliminary view on its business situation and market condition, which is subject to change. This concludes our prepared remarks. I will now turn the call over to the operator to start our Q&A session.

Questions & Answers:

Operator

[Operator instructions] Your first question comes from Tim Hsiao with MS. Please go ahead.

Tim Hsiao — Morgan Stanley — Analyst

[Foreign language] So my first question is about the margin. Despite third-quarter margin beat, Li Auto has been scaling up the vehicle discount and benefits since the quarter, and most of the promotions singly continued fourth quarter. As there are more competitive models coming to the market in the following months and the tag team to take on Li Auto, would the company consider to respond with more aggressive promotions or spec upgrade to your current lineup? And would that affect the auto vehicle margin in fourth quarter and beyond? So insurance, should we still consider 20% plus a reasonable and sustainable level for vehicle gross margin against such a tough competition backdrop? That’s my first question. Thank you.

Johnny Tie Li — Chief Financial Officer

Thank you, Tim. This is Johnny. I think for every quarter and every year, we will take a full consideration between sales and volume growth and the gross margin when we plan our sales policy and promotion policy. As — and also every quarter, our sales policy will also add our supply chain effort, which solves some of the sales policy promotion.

So I still want to emphasize from the company’s operations side, each quarter and every year, we want to keep our gross margin above as we believe that will be a healthy margin to keep enough money on hand to invest on either R&D and also the service network expansion for the future. Thank you.

Tim Hsiao — Morgan Stanley — Analyst

[Foreign language] So my second question is about autonomous driving. Tad greater importance to the development of smart driving and planning to increase the overall investment. So could management team help us to quantify Li Auto’s investment plan in autonomous driving? Like how much you are going to spend in 2024 and ’25? And how many people are you playing too high? And in the meantime, what would be the best way for investors to track the progress? For example, when will Li Auto activate the urban NOA function to hold public users across the cities? And will you keep offering such function for free after more sizable investment this year? That’s my second question.

Donghui Ma — President

[Foreign language] Mr. Ma Donghui. First of all, on a strategic level, the company has always been very focused on investments in autonomous driving. In the fall strategy summit of our company, we had a thorough discussion around autonomous driving and reached consensus to making smart autonomous driving leading in the market, our core strategic goal.

So the company will continue to increase our investment in autonomous driving. At this point, the R&D team for autonomous driving is around 900 people, and it’s expected to reach about 2,000 by the end of 2024 and over 2,500 by the end of ’25. As the scale and talent density of our R&D team growth, we will develop technology as well as product at the same time. On the one hand, we will continue to deploy our 80 products across multiple vehicle lines, across multiple scenarios of deploying NOA in multiple scenarios.

On the other hand, we will continue to invest in AI algorithms of autonomous driving as well as other cutting-edge technology. In terms of investments, we will continue to increase the amount of investments in vehicles, in testing, computing power, and personnel. Our ample cash reserve and cash flow will be a very strong support for our continued investments. In terms of progress, as Li Xiang mentioned earlier, we plan to deploy AD Max 3.0 software on all of our Max — our vehicles equipment with AD Max, providing full scenario NOI features using the same BEV architecture, and we will also be adding valet parking feature to our AD MAX users.

At the same time, in the first half of ’24, we will be releasing AD Pro 3.0 to our Pro users. Part of the AD Max algorithms will be deployed on AD Pro, and the capability of autonomous driving will also be significantly improved. We’re confident to become one of the top tier 1 players in the market that is proven by the market. In terms of product lineup strategies, we will continue to make AD standard on all of our vehicles, which allows us to have the largest training fleet of autonomous driving vehicles in the country and also more training mileage, which will accelerate the deployment and iteration of our foundational model algorithms.

Tim Hsiao — Morgan Stanley — Analyst

Thank you very much for sharing all the details. Super helpful. Thank you.

Operator

Your next question comes from Tina Hou with Goldman Sachs. Please go ahead.

Tina Hou — Goldman Sachs — Analyst

[Foreign language] Congratulations on a very strong set of results. So I have two questions. The first one is as we are expanding our footprint into more and more cities, so how does management view the different type of customer need or demand in higher-tier city versus lower-tier city for both EREV product as well as BEV product? And how does Li Auto plan to adjust its marketing and sales strategy to better capture this differentiated demand? The second question is regarding your supply chain as well as cost reduction plan. So wondering if our supply chain bottleneck has been completely resolved at this point.

And how do we — going forward, how do we best manage the supply chain to be able to fulfill our growing demand? Regard — related to that is, do we have any cost reduction plans and targets over the next few years? And lastly, is the — over the next two years, what is our capacity plan as well as our capex guidance? Thank you.

James Liangjun Zou — Senior Vice President, Sales and Service

OK. Tina, this is James. I will take your first question. And in the SUV market priced over RMB 300,000, our market share in our well-developed cities reached 50% in some of the cities, while our average market share across the whole market is less than 20%, which means there is plenty of room for our future growth.

Overall, we will continue to focus on first-tier, new tier — new first-tier and second-tier cities, aiming to increase our market share in these top-tier cities. Currently, we haven’t reached market saturation in first- and second-tier cities, and we will have huge growth potentials in those cities. In RMB 300,000 and higher SUV market, the monthly sales of BEV are approximately 55,000 units in total. And if we consider the second-tier premium and automotive brand, which include in BEV and the other brands, and they are around 90,000 units, which means we have ample room to achieve our next stage of growth.

Additionally, we have begun to accelerate our deployment in third-tier cities and speed up our store openings in certain key four-tier cities. And let me give you some numbers. As of today, we have more than 300 retail stores nationwide, among which they are more than — they have already more than 100 retail stores deployed in the third-tier and fourth-tier cities. According to our current progress, we expect to have more than 110 retail stores in third-tier and fourth-tier cities by end of this year.

I hope I have answered your first question, I will hand over to Mr. Ma for the second one.

Donghui Ma — President

First of all, regarding supply chain bottleneck, all of the issues that we have encountered before have all been successfully resolved. As opposed to the — regarding new models and our sales target for next year, we have made ample preparations across, not only whole vehicle production capacity, but also parts supply. We have medium- to long-term supply chain strategies to make sure that our supply chain is resilient over time. On cost reduction, our overall view is that OEMs should establish long-term and stable partnerships with our suppliers to achieve a mutually beneficial relationship for the two sides.

For the short term, our short-term cost reduction measures will mostly be focused on business measures through platformization, volume aggregation, and cost accounting to drive our procurement costs to a reasonable level. For the medium to long term, we will look at the entire value chain from end to end to find way to increase efficiency and reduce costs, including from product, R&D, technology innovation to drive down costs. At the same time, we will also work with our suppliers to help them digitize and industrialize to increase the efficiency in the production process and reduce quality-related costs. In terms of overall vehicle production capacity, we have two manufacturing base in Beijing and Changzhou, three production lines in Changzhou dedicated to REV models, L9, L8, and L7 as well as L6, which will be launched next year.

In Beijing, there is one production line dedicated to our BEV products. Our production capacity is sufficient to meet the needs for sales and deliveries for the next two years.

Tina Hou — Goldman Sachs — Analyst

[Foreign language] Thank you very much, management, for the clear answers.

Operator

Your next question comes from Jiong Shao with Barclays. Please go ahead.

Jiong Shao — Barclays — Analyst

Thank you very much for taking my question, and big congrats on the very strong results. I mean competition has been on the top of the mind for many investors with recent launch by Huawei and auto of the sort of the larger SUVs, and their SUV is also ERV. And also the Denza, the BYD Denza brand is launching some of the large SUVs as well. I was wondering could you share with us your thoughts around competition, around customers’ buying behavior? You talked about market share earlier.

Are you seeing any impact yet on our market share and on your market positioning? Thank you.

James Liangjun Zou — Senior Vice President, Sales and Service

OK. Jiong, this is James. I will take your question. So although this year, the competition in the new energy vehicle market is relatively intense, we once again achieved impressive sales results.

Our models retained strong sales momentum, and each model is a blockbuster. Until now, the delivery of all of our models, including L9, L8, and L7 also has reached exceeded 100,000 units. And just yesterday, our L7 has exceeded 100,000 units in less than 10 months because this product launched in March this year. And also our sales have achieved steady and continuous growth, while our share in the NAV market priced about RMB 200,000 continued to rise, from 10.9% in the first quarter to 15.4% in the third quarter.

And I can give you another number. Like in last month, October, our market share is already more than 17%. At present, the penetration rate of the new energy vehicle market has exceeded 35% across the innovation division gap to entering the early Max period. The concentration effect of leading auto companies will become increasingly evident, and our accumulated user base and the market share will support our further increase in delivery volumes and market share gains.

And I hope I answer your questions.

Jiong Shao — Barclays — Analyst

Thank you very much, James.

James Liangjun Zou — Senior Vice President, Sales and Service

Thank you.

Operator

Your next question comes from Xu Yingbo with Citic Securities. Please go ahead.

Yingbo Xu — Citic Group — Analyst

[Foreign language] My first question is how we balance the technology advantage, especially we mentioned about the low drag coefficient and balance between consumer recognition for market management, especially for blind order.

Xiang Li — Founder, Chairman, and Chief Executive Officer

[Foreign language] Talk about Mega and all of our BEV products, in terms of traditional values, including safety features and comfort, Mega will continue to focus on family’s needs and make sure that we will be the absolute best or among the absolute best in the industry. On top of that, all of our BEV products will have three breakthroughs. The first one is breakthrough on charging experience. It can provide up to 500 kilometers of range with 12 minutes charging, and we will also be deploying large-scale charging stations on major highways in China.

So any consumer can buy one of the BEV vehicles with total confidence about their charging experience. And secondly, as a breakthrough on interior room, with our high-voltage pure electric architecture, we will be able to completely redesign vehicle architecture to make sure the interior space of our products are always the biggest among the segments, even reaching the level of next segment up, which provides the best interior experience for family users. And thirdly, all of our products will have a breakthrough in terms of styling and body style. All of our styling will be redefining each one of the traditional categories, whether MPV, SUVs, or sedans.

We will be bringing design language from decades down the road and to launch them on our existing vehicles as if they come — they’re only concept vehicles, but they are actually production vehicles that will launch into the market. Through these three breakthroughs, we’ll be able to provide very unique value to our customers. The first one is the sense of safety from charging or the experience of charging, and the second is the sense of value from very large interior space, and third is the sense of longing from very exciting styling. And all of our BEV products will be following these three principles.

Yingbo Xu — Citic Group — Analyst

[Foreign language] My second question is how we see — we see that the EV product become more and more homogination and more larger screens, more smart interactions and controls. How we make EV product more differentiation? Thank you

Xiang Li — Founder, Chairman, and Chief Executive Officer

[Foreign language] I think my earlier response covered a lot of your question, and I just want to emphasize that our focus has always been our core user value, what makes the most — create the most value for our users. I think with the intense competition, as you mentioned, incremental changes are definitely taken for granted, whether it’s lower price, whether it’s more features or more screens. These are things we’ll definitely do well in. But when we think about competition, we think it’s really the way to stand out is to compete on a higher dimension and to create — really focus on the three values that consumers care about most, and taking 5C charging as an example.

In our real-world chart testing, even when the battery state of charge reaches 85%, it can still have a charging power of over 300 kilowatts, which is even higher than the maximum charging rate of many other competitors. This really established a new standard for the industry, and that is only the result of years of innovation through product and R&D in our efforts, and that is something we will continue to invest in and continue to prove — create value for our users.

Operator

[Foreign language] Your next question comes from Ming-Hsun Lee with BofA. Please go ahead.

Ming-Hsun Lee — Bank of America Merrill Lynch — Analyst

[Foreign language] So currently, Li Auto has put a lot of charging stations in China. So what is the difference on charging stations within the cities and also on the highway? And in terms of your charging technology and also user experience for EV, how do you want to differentiate from your competitor?

James Liangjun Zou — Senior Vice President, Sales and Service

OK. Ming, thanks for your question. This is James. I will take your question.

At present, in urban areas, whether it is public charging or home charging, consumers have good access to charging facilities that provide a decent charging experience. Therefore, for BEVs, we must first tackle the most critical pain point and focus on fulfilling the need for rapid energy replenishment during highway, long-distance travel. Through the construction of large-scale charging stations along the highways, coupled with experience of charging for 12 minutes to support 500 kilometers driving range, we strive to eliminate consumers’ worries around BEV purchases. Furthermore, with the launch and the delivery of the BEVs next year, we will also start the construction of charging stations in cities.

In addition, with respect to product experience, we will consider both the hardware and software as a whole product. For example, when Li Auto car owner is looking for a charging pile, the status of charging gun and charging pile can be checked on the infotainment system in the car. We also provide plug-and-play, possible prepayment, among those services, to provide a better experience for our users. And for BEVs, the batteries can be remotely preheated.

We think from user experience perspective aiming to help our users have a better charging experience OK. This is my answer.

Ming-Hsun Lee — Bank of America Merrill Lynch — Analyst

[Foreign language] So Li Auto and also some other companies have first-generation BEV start-up in China. But currently, we are seeing more and more competitive peers to enter the market, for example, or corporate with a lot of partners in China and also start to bring some good sales. Xiaomi now will also launch a car in 2024. So in your view, for the longer term, how do you think of the market dynamic in China to the BEV industry? And for auto companies, how can they provide or upgrade well? How do you think –what is the most important in BEV? Thank you.

Xiang Li — Founder, Chairman, and Chief Executive Officer

[Foreign language] First of all, I think what many people are really asking is how do we look at the competition from Huawei, and this is actually a question we have broad consensus across the company. When we look at Huawei, 80% of what we’re thinking is how do we learn from them, and 20% is really respect. And there’s zero complaints, in fact. Because as we become a company that has — we’re still a start-up company and as we reach the RMB 100 billion revenue benchmark — milestone, we’re actually very lucky and impressed to have a role model, which has done businesses on the scale of RMB 1 trillion.

So we’re very excited to have Huawei along the way. And when we look internally in terms of how we want to weather the storm and stand out in intense competition, we look at really nine areas across three broad categories. The first category is really the consensus across the company. And that includes culture, brand — consumer brand, and strategy.

And the second category is our business operations, which covers from R&D, sales and services, supply chain, and manufacturing. And lastly, is back-office functional functions, which includes HR an organization, IT and processes, and finance and operations. And to become a company that can really handle RMB 100 billion of revenue, we really need to excel in all areas. There can’t be any one shortcoming, and that will be the core foundation for any company that wants us to reach the scale of 1 million unit sales annually.

Operator

Your next question comes from Jing Chang with CICC. Please go ahead.

Jing Chang — CICC — Analyst

[Foreign language] So my first question is about the short-term question. Regarding the production ramp-up and profitability of Mega, as our Beijing BEV platform will be put into production along with the long trough Mega, how long do we expect to the steady capacity? And what is the early stage profitability level of Mega? And will it be a driving problem on our gross profit margin in the first and second quarter next year? And my second question is about the — our new product pipeline next year, especially for the BEV models. We know that there are two platforms, rear and shock, and the former one corresponds to maybe larger and more extensive models. So do you have any more information about their product positioning and in order to launch the market or the timing of the delivery?

Xiang Li — Founder, Chairman, and Chief Executive Officer

[Foreign language] Speaking of challenge, Mega will be our very first BEV vehicle and also the debut of our BEV platform also in a new factory in Beijing as well as new production line. So there’s definitely challenges. But at the same time, we think there are many opportunities for us to overcome the challenge. First of all, we have plenty of experience in rapid production ramp-up.

The Li L8, L9, and L7, all these three vehicles have ramped up pretty rapidly and reached very high delivery numbers within a short period of time. And as we look back at these experience, we’ve accumulated a lot of great experience in rapid production ramp-up. At the same time, we’ve also worked with our suppliers to work through our NUDD parts, namely new, unique, different, and difficult. We have created a very detailed quality control and production ramp-up plan.

In terms of personnel, we will front-load our recruiting and training to prepare for the start-up production. Overall, we are pretty confident that the ramp-up of Mega will be relatively successful and it will be able to reach volume immediately after it comes to the market and after — it will be able to be delivered immediately after the product launch and reach volume immediately after its first delivery. Mega would be officially launched in December. And at the beginning of production ramp-up, we would expect to be a slight impact on gross margin, but we believe that as production rate steadies, gross margin will very rapidly recover to a very healthy level. Mr.

Li Xiang to answer the question on product line. Next year, we will be launching four new — completely new models, which creates a record for — since the company’s beginning. In the first half, we’ll be launching another large SUV product catered toward younger families called the L6. And in the second half, we’ll have three BEV models.

The rate and the method of launch will be very similar to the successful experience from our previous products.

Operator

As we are reaching the end of our conference call now, I’d like to turn the call back over to management for any additional or closing comments.

Kobe Wang — Head of Capital Markets

Thank you once again for joining us today. If you have any other questions, please feel free to contact Li Auto’s IR team. Thank you. Have a good one.

Bye-bye.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Kobe Wang — Head of Capital Markets

Xiang Li — Founder, Chairman, and Chief Executive Officer

Johnny Tie Li — Chief Financial Officer

Tim Hsiao — Morgan Stanley — Analyst

Donghui Ma — President

Tina Hou — Goldman Sachs — Analyst

James Liangjun Zou — Senior Vice President, Sales and Service

Jiong Shao — Barclays — Analyst

Yingbo Xu — Citic Group — Analyst

Ming-Hsun Lee — Bank of America Merrill Lynch — Analyst

Jing Chang — CICC — Analyst

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