EHang Holdings Ltd (EH) Q4 2022 Earnings Call

EHang Holdings Ltd (NASDAQ:EH) Q4 2022 Earnings Conference Call March 22, 2023 8:00 AM ET

Company Participants

Anne Ji - Senior Director, Investor Relations

Xin Fang - COO

Richard Liu - CFO

Huazhi Hu - Founder, Chairman & CEO

Nick Yang - Independent Director

Conference Call Participants

Operator

Good day, ladies and gentlemen. Thank you for standing by, and welcome to the EHang Fourth Quarter 2022 and Fiscal Year 2022 Earnings Conference Call. As a reminder, we are recording today's call. Now I will turn over the conference to Anne Ji, EHang's Senior Director of Investor Relations. Ms. Anne, please proceed.

Anne Ji

Hello, everyone. Thank you for joining us on today's conference call to discuss the company's financial results for the fourth quarter and fiscal year of 2022. The earnings release is available on the company's website. Please note that the conference call is being recorded. The audio replay will be posted on the company's IR website.

On the call today, we have Mr. Huazhi Hu, our Founder, Chairman and Chief Executive Officer; Mr. Xin Fang, Chief Operating Officer; Mr. Richard Liu, Chief Financial Officer; and Nick Yang, an Independent Director of the Board. The investment team will successfully give prepared remarks. Remarks delivered in Chinese will be followed by English translations. All translation is for convenience purpose only. In case of any discrepancy, management's statement in the original language will prevail. A Q&A session will follow afterwards.

Before we continue, please note that today's discussion will contain forward-looking statements made pursuant to the safe harbor provisions 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 materially different from the expectations expressed today. Further information regarding these and other risks and uncertainties is included in the company's public filings with the SEC. The company does not assume any obligation to update any forward-looking statements, except as required under applicable law. Also, please note that all numbers presented are in RMB and are for the fourth quarter and the fiscal year of 2022, unless stated otherwise.

With that, let me now turn the call over to our CEO, Mr. Huazhi Hu. Please go ahead, Mr. Hu.

Huazhi Hu

This is the English translation of Mr. Hu's remarks. Hello, everyone. Thank you for joining our earnings conference call today. 2022 as a year of opportunities and the challenges for EHang. Against the ever-changing backdrops of macroeconomic volatilities, political uncertainties and pandemic, we remain committed to our strategies and continue to make meaningful progress during the year in our main priorities of airworthiness certification, business development and ecosystem establishment.

This not only strengthens our resilience for long-term development, but also reinforce our leadership in a global urban mobility industry. In the fourth quarter of last year, the EHang 216-S type certification successfully entered the final phase of the demonstration and implication of the companies. However, due to the massive infections after China lifted COVID control policies, until this year's Chinese Dragon holiday, a relevant TC project was delayed to a certain extent.

But now we have manufactured the confirming aircraft for the purpose of air witness verification at our Yunfu production facility, past the aircraft manufacturing conformity inspection and are conducting compliance tests at a flight basis in Guangzhou, Hezhou and other locations.

In February this year, the CAAC Chief Engineer and officials from the Department of the Aircraft Airforce Certification, the Department of the Flight Standard, the office of Air Traffic Operations, the Central and South Regional Administration as well as the experts from the TC team, expect the 5 base in Hezhou.

We worked together effectively and the joint efforts of all parties not only accelerated the compliance flight test and are in review process in the final stage, but also made plans and arrangements for the next steps, which boosts our confidence in post certification operations.

As of today, we have been actively carrying out the work for demonstration and verification compliance based on the means of a compliance agreed by the CAAC. Our work includes submission of compliance test plans, laboratory tests, ground test and inspections, flight tests, et cetera.

At present, over 70% of compliance tests has been either completed or to be signed soon. It means we have substantially completed over 90% of the entire type certification process. We believe EHang is leading amount, the few eVTOL type certification projects that have been officially accepted by civil aviation regulators worldwide. Although the TC process for such a new innovative aircraft is full of difficulties, I'm proud of our teams award-winning efforts and groundbreaking achievements over the past few years. At the same time, we are very grateful to China Civil Aviation Regulator, the CAAC, for their full support and high attention to this innovative AV.

We believe we will bring expected good news in the near future. Therefore, we believe we're particularly entering a new year of air mobility in 2023 and anticipate witnessing and [indiscernible] milestone in a global UAM industry.

What is worth mentioning other than EHang being the better industry leader is the large Chinese market that we alluded in and its huge potential for the UAM development. According to Morgan Stanley's forecast, China is expected to account for about 30% of the global UAM market. In recent years, Chinese central and local governments have introduced a series of supportive policies for emerging sectors related to [indiscernible] aviation, electric aviation, low altitude economy, urban 3-dimensional transportation, aviation tourism and so on. This has provided us with beneficial policies, a favorable market environment and a growing demand from government and enterprise customers.

Our COO, Mr. Xin Fang, will talk more about it later. On the other hand, China has been a leader in the global UAV industry, and has accumulated a profound expertise in aspects of upstream and the downstream industry chain and professional pilots. Besides, China has the supply chain advantages of higher cost effectiveness and the delivery efficiency. This lead a solid foundation for our product R&D, manufacturing and product delivery.

The overseas market, we are committed to actively engaging in Asian market and participating in multiple air mobility projects in Europe as an aviation pioneer. We will continue collaborating with local customers, partners and governments to jointly explore a safe, intelligent, efficient and a sustainable UAM operational system.

To date, the EHang 216 Series AAVs have successfully completed over 34,000 autonomous sites across 12 countries in Asia, Europe and Americas, which is the top line record in the global aviation industry. Looking ahead, we will remain dedicated to expanding our reach and bring our AAV solutions and flight experiences to more customers, partners and passengers worldwide. In December last year, we are thrilled to welcome Mr. Nick Yang, joining our Board of Directors as an Independent Director. Although he is a new member of the Board, he's also our old friends as one of the EHang's early investors who has been following the company's growth and the development of the UAM industry for many years.

With over 20 years of capital market experience and entrepreneurial experience in [indiscernible] listed companies, I believe that Nick will bring strong support to EHang's growth in our new stage. Today, we also have Nick with us on the call, and he will be available to communicate with everyone in the Q&A session later. Next, I will turn over the call to our Chief Operating Officer, Mr. Xin Fang. Thank you.

Xin Fang

This is the English translation of Mr. Fang's remarks. Thank you, Mr. Hu, and hello, everyone. Since the fourth quarter of last year, our top priority remains the TC project. We are pleased to report that we are now in the final sprint.

In preparation for post certification, sustainable long-term growth, we are capitalizing our leading first mobility advantages to explore both domestic and overseas market. We have been expanding our business and cooperation opportunities throughout the entire industry chain related to air mobility and the low-altitude economy.

The building of order demand, enhancing our partnership and cooperations, we are laying a solid foundation for commercial delivery and operational services following certification.

In China, the tourism industry, which has seen heavy impact from COVID, has rapidly recovered this year after control policies were lifted. The China Tourism Academy predicts that in this year, the number of domestic tourists will reach 4.55 billion, up 8% compared to last year, and the domestic tourism revenues will reach RMB 4 trillion, about USD 508 billion, an increase of 95% compared to last year. This presents excellent development opportunities for the low-altitude tourism.

The first market where we plan to launch commercial operations after certification as well as for our tourism industry customers. Since last year, we have been dedicated to developing our domestic market in China against the backdrop of macro policies promoting low altitude tourism and economy, building a more than integrated transportation system and developing new smart cities.

We have continued extensive and deep business cooperations and industry layout with local governments, tourism and aviation enterprises in many provinces and cities such as Guigang in Guangxi, Jishou and Changsha in Hunan, Huangshan in Anhui, Qingdao, in Shandong, Ganzhou and Jiujiang, in Jiangxi, Xi'an, in Shanxi, Shenzhen in Guangdong, et cetera.

To date, we have received orders for over 100 units of the EHang 216 series AAVs in China. These orders are expected to be fulfilled within 1 to 3 years after the TC process is completed. Additionally, with the approach of TC completion, there has been a significant growth in our customers' inquiries and the demand for new orders from all over China.

For example, most recently, Xiyu tourism, a leading tourism company in Xinjiang and listed on Shenzhen Stock Exchange announced its intention to sign a cooperation framework agreement with us. It plans to establish our joint venture and operate a minimum of 120 units of EHang 216-S, where our comparable passenger-grade AAVs in 5 years for conducting low-altitude sightseeing tourism projects in key scenic locations in Xinjiang, such as the heavenly lake of Tianshan.

Another example, in March this year, Xi'an Aerospace Investment Company signed their strategic partnership agreement and a indicative purchase order with us. They plan to buy 20 units of EHang 216 aircraft within 3 years in order to develop a smart air city and the low-altitude flight demonstration area in the Northwest China.

Meanwhile, Hong Kong partnerships with strategic investors who are willing to cooperate with EHang for long-term growth. For example, last December, Qingdao West coast a new area reached a long-term strategic partnership with us over investment and business. It has not only provided a USD 10 million investment, but will also facilitate the local government applications of our entire product portfolio, which is expected to generate project demand worth of RMB 100 million, about USD 15 million within the next 2 years. They will also provide full support to our local business operations, sales and services, production and infrastructure constructions, among other things with the goal of building Qingdao City into an outstanding world-class pilot zone for UAM demonstration and applications.

In the future, we plan to adopt an integrated business strategy that both selling products and providing operational services for government and enterprise customers. Based on the principles of [indiscernible] high standard, low cost and high efficiency. We will utilize a complete set of AAV common control system platform and UAM operation system to support our 3 major businesses, which are air mobility, smart city management and aerial media. Therefore, we are able to meet our customers' demand for diversified applications in low-altitude tourism, urban transportation, aerial logistics, firefighting emergency, medical rescue, smart city management and aerial media, et cetera.

In the past 2 years, under the CAAC guidance, we have been taking the lead in carrying out trial operations while conducting type certification. To date, we have developed 18 operations spots for aerial sightseeing in 16 Chinese cities. More than 8,200 safe operational trial flights have been completed with EH216 AAVs.

During this process, we have cultivated professional and [indiscernible] AAV operations team, develop a digital platform for AAV operation management and services, and accumulated to reach feasible and replicable cloud operation experience. All of these give us ample confidence and ability to create a considerable UAM price service values together with our customers and partners in the future upon obtaining certification and beginning commercial operations. This is also our first mover advantages and operation benchmarks that we have built over the long term and are ahead of other companies in the industry.

Additionally, we have been actively working on expanding cooperation across the UAM upstream and downstream industry chains as well as building the ecosystem. For example, we are very pleased to partner with Haeco Group, a subsidiary of Swire Group, in last October. This partnership tends to be an after-sales maintenance service system for EHang AAVs to provide our customers worldwide with more high-quality and efficient maintaining service while empowering our continued airworthiness following certification.

In overseas markets, such as Asia, last year, we actively explored market in Japan, Malaysia, Indonesia and Thailand, secured more than 200 units of preorders for EHang 216 series and established cooperations with local partners to carry out local trial flights surrounding AAV application scenarios such as low-altitude, sightseeing toruists and [indiscernible] mobility and logistics transportation.

This February, we successfully conducted the first passenger-carrying EHang 216 demo flight in an open air space overseas in Japan. This is also the first ever passenger-carrying flight of an autonomous aviator in Japan with approval.

In Europe, in the fourth quarter of last year, we completed the EHang216 first flight in Spain and used AMU-LED project to successfully verify the UAM concepts of operations. We also joined the UAM SAMVA project to explore an aircraft system traffic management. In addition, we assisted the Spanish National police to completing EHang216 Maiden flights for their travel operations.

As noted by Mr. Hu, 2023 is a crucial year for us. As the turning point of airworthiness certification approaches, EHang and even the entire UAM industry are about to enter into commercialization. We are prepared and confident and feel responsible to be a pioneer for commercialization in the global aviator industry's. We plan to provide earnings guidance after specification. I will now turn the call over to our CFO, Mr. Richard Liu, for financial results. Richard, please go ahead. Thank you.

Richard Liu

Thank you, Xin. Hello, everyone. Before I go into details, please note that all numbers presented are in RMB and for the fourth quarter and the fiscal year of 2022, unless stated otherwise. All percentage changes are on a quarter-over-quarter basis unless otherwise specified. Detailed analysis are contained in our earnings press release, which is available on our IR website. I will now highlight some of the key points here.

Despite numerous uncertainty and challenges in 2022, we not only moved to the final phase of type certification, but also achieved significant progress in developing business and building an AAV ecosystem for post certification growth.

Meanwhile, we further enhanced our cost management, operational efficiency and the financial numbers and we are optimistic to see a turning point for the expected expansion of our commercial operations and a new era for our company and the UAM industry.

In Q4, total revenues were RMB 15.7 million, an increase of 90.7% from RMB 8.2 million in Q3. The EH216 series of AAV deliveries in Q4 were 6 units, up 50% from 4 units in Q3. For the fiscal year 2022, total revenues were RMB 44.3 million compared with RMB 56.8 million in 2021. The EH216 series of AAV deliveries in 2022 were 21 units, compared with 30 units in 2021.

Gross margin was 66.1% in Q4, a slight increase of 0.2 percentage points from 65.9% in Q3. Gross margin was 65.9% in 2022, representing an increase of 2.5 percentage points from 63.4% in 2021, mainly attributed to the higher average selling price of EH216 AAVs. This represents the continued high gross margin levels compared to those of other electrically powered mobility products such as electric vehicles as a result of our competitive strengths and first-mover advantages in the global UAM and EV industries.

In Q4, our adjusted operating expenses, which are operating expenses, excluding share-based compensation expenses, were RMB 73.2 million compared to RMB 59.7 million in Q3. The increase was mainly driven by the noncash item of additional proven provisions for receivables in response to the impact of COVID into customers and more expenditure on aircraft conformity for EH216-S in its verification process for type certification with reductions in travel and marketing expenses and professional service expenses, et cetera.

On an annual basis, the adjusted operating expenses were RMB 242.4 million in 2022, compared with RMB 246.6 million in 2021. As a result, our adjusted operating loss in Q4 was RMB 61.3 million compared with RMB 52.9 million in Q3. Adjusted net loss in Q4 was RMB 59.4 million compared with RMB 55.1 million in Q3.

For the fiscal year, adjusted net loss was RMB 206.2 million in 2022, compared with RMB 192.8 million in 2021. Moreover, our cash balance remains solid as we have been proactively managing our cash position and assessing our liquidity. As of the end of Q4, we had RMB 249.3 million of cash, cash equivalents, restricted cash and short-term investments compared with RMB 208.8 million as of the end of Q3.

In December, we formed a strategic partnership with Qingdao West Coast new area, one of China's national new areas in Shandong province. This partnership comes with a USD 10 million equity investment into the company and a potential additional investment of USD 10 million in the future. This serves as additional liquidity support for operations and growth. That concludes our prepared remarks. Let's now open the call for questions. Operator, please go ahead.

Question-and-Answer Session

Operator

[Operator Instructions]. We are now going to proceed with our first question, and the questions come from the [indiscernible].

Unidentified Analyst

I have two questions. First of all, it's about the TC progress. Could you share when we expect to get a TC, and how should we think about the time line for the mass production delivery and also focus the revenues? Is it like after 1 to 2 months, we get a TC or we will have revenues and also the cash inflow? Or do we have enough time to hire the people for the mass production?

And the second question is about the responsibility. Could you share if the value happens, is there a clear line of who to take the responsibility? Or for example, the users, if they do not operate properly or the component makers, if it is caused by the certain component failure, or it could be really hard to prove what reasons caused the failure and eventually, we will need to take all the responsibility.

Nick Yang

Yes, this is Nick. As Mr. Hu mentioned earlier, the TC process has completed over 90%. It's just a matter of time, and it's near the end now. If you compare with the other aviaton company's progress, I think EHang is far ahead. Most importantly, EH216S -- can anybody hear me? Hello?

Unidentified Analyst

Yes, I can hear you.

Nick Yang

Am I connected? Hello.

Unidentified Analyst

Yes, we can hear you.

Nick Yang

Yes. Can anybody hear me? I disconnected.

Operator

We can hear you, Nick.

Nick Yang

Sorry about that. Yes, as Mr. Hu has mentioned earlier, the TC process has completed over 90%. So it's just a matter of time that we complete the entire process and it's near the end right now.

So if you compare this to other aviation companies progress, I think EHang is very far ahead. Most importantly, EH216-S is the only autonomous one among our eVTOL TC projects, as you know, while other ones are all piloted.

For details, EHang has published the illustration about the entire TC process and a checklist of key milestones it has accomplished. So we want to bring clarity to the process, and we'll update it very timely. So this will act as a status bar and it's very available on the IR website.

So regarding to the post TC production and delivery, I think it won't take much time or concern to generate revenue soon because the company has prepared for all along by collecting more and more preorders beforehand. So getting -- and also getting the Yunfu production facility to establish an operational for almost 2 years and procured stocks of key components from suppliers.

All these efforts can shorten our lead time to delivery. So for cost cultural reasons, we have over 100 workers in our manufacturing facilities. So that's enough for the near term. But so if you needed, the company is very able to hire more local staffs in the future. Okay.

Anne Ji

The second question will be answered by our CEO, Mr. Hu and followed by English translation.

Huazhi Hu

Okay. Thank you for your questions. Firstly, on general expenses, aviation accident are costing multi-factors and determine responsibility for airport access with clients rationalize the stiction element regulatory authorities, which is the home with a complex process. And this investigation is required to primaries met factors related to the accident before final utilization in demand.

And in order to ensure safety and prevent accidents, we have adopted a redundant measures in the technology design and the structural safety and imitation of the [indiscernible] AAV, and this ensures there is no single point of metal. And since our AV autonomous, the passengers on board denominated pilot. As a result, there is no [indiscernible] have the cost and [indiscernible].

We will also create operational rules and promote safety instructions to the passengers to ensure their safety. And in terms of our production and manufacturing, we strictly manage our suppliers and the production procedures with the high-quality standards in accordance with the requirements of the CAAC and ensuring that we can create the original sources will be determining the period authority.

And in terms of operations, we'll also set our standards for operators and the testers are now training. So as to ensure operations is throughout the closes. And last, we provide our liability insurance coverage for our aviation products and passengers as well as the relevant third parties. That is the answer to your second question. Thank you.

Operator

[Operator Instructions]. We are now going to proceed with our next question. The next questions come from the line of [indiscernible] from Tianfeng Securities.

Unidentified Analyst

I have two questions as well. First is as EHang is more focusing on China market and you talked about an increasing customer demand in China, could you share more color over the total revenue EHang216 pipeline orders, can you deliver these orders without specify obtain?

And my second question is our company has secured a significant number of free order in Asia, I mean, excluding China. Do these preorders also have type certification in respective countries or your progress of type certification in China help these foreign type patients? Or is it like a whole new process all over again?

Richard Liu

This is Richard. Let me take the questions. First of all, as discussed earlier, we currently have an order pipeline of 100-plus units per year in China. And this order pipeline has been going with increasing inquiries, discussions from more potential customers in China, especially from the [indiscernible].

And the related total content value would amount to around RMB 200 million or more. And if you set part of the VAT in China, we can get the corresponding venue estimate roughly around 177 something R&D. So as put in our earnings release, most of these partner orders in China are conditional upon the TC and are practical to be in 1 to 3 years after that.

However, were indeed some customers in China, we are more sophisticated and understand that the TC is to be obtention and thus, do not require that before the others.

In respect of your second question, those preorders in other Asian countries are usually require a local TC. Well, we have been working with our local partners in communicating with local aviation it. What we have been experiencing is that onto Asian countries are open money to this type of innovative area vehicles. and is actually interested in the uses in program, which is an important industry in their respective economy. So after we obtained the selection in China, you look to vibe for us to certify for the local sections with the local aviation as and we do not have to go from the given example in both Southeast Asian countries like Indonesia, we increased price for the local do a called EPC process, namely validation of type certificate with the local aviation authorities, and it is expected to be a simplified process. So we will help sorting the time and be more efficient for us to establish and further expand our market profits in those countries.

Operator

The questions come from [indiscernible] from Morgan Stanley.

Unidentified Analyst

I only have one question on margin. EHang currently has quite good gross margin at around 60%. And how should we think about the gross margin this year and over time, especially after we kick off our commercial operations?

Richard Liu

Thank you. I will take the questions. The current [indiscernible] percent or GP margin is actually a comprehensive margin covering our vehicle hardware and software products and services. At the core of the company, the technology advantage actually license our software. But to some extent, Yihaodian, a software-based techno company that integrates in [indiscernible] or vehicle products and separate Gitlin markets. In addition of the keys for H215 assess expected to be obtained on [indiscernible].

After that, we were probably the only company in the market, especially in China [indiscernible]. So as you can tell, we work have some more pricing power on the market. Further, our sales are expected to scale up of the GC is also anticipated we would also have more negotiation power suppliers to control our opportunity costs. And therefore, it is affected, we will continue to maintain this 80% GC margin level.

Operator

Due to time constraint, we will end the Q&A session here. And I would like now to turn the call back to Ms. Anne for closing remarks.

Anne Ji

Thank you, operator, and thank you all for listening in on today's call. If you have further questions, please contact our IR team by e-mail or on investor through the calendar information provided on our website. We appreciate your interest, and we look forward to our next earnings call. Thank you.

Operator

Thank you all again. This concludes the conference call today. You may now disconnect your lines. Thank you.