Maintaining the annual sales target of 230,000 units, the 15% gross profit margin target for the automotive business remains unchanged (ZEEKR 2Q24 conference call minutes)

The following is the summary of ZEEKR's Q2 2024 earnings conference call. For an interpretation of the financial report, please refer to "ZEEKR: Redesign criticized as a "betrayal" to old car owners, can it achieve a rebirth?"

1. Review of Core Financial Information:

2. Detailed Content of the Earnings Conference Call

2.1. Key Points from Management's Statements:

1) Financial Highlights:

① Revenue:

• Automotive sales business: Gross margin slightly increased to 14.2%, mainly due to cost reduction from increased car sales, but offset slightly by a decrease in average selling prices.
• Battery and components business: Sales revenue of 5.3 billion RMB, a year-on-year increase of over 36%, and a quarter-on-quarter decrease slightly higher than 16%. The gross margin of these departments exceeded 20% this quarter. With cost reduction efforts, we gained some suppliers in the second quarter of this year. If you look at the data for the first half of 2024, the gross margin is around 12% to 13%. This aligns with our full-year gross margin expectation for this department, at around 10%-12%.

② R&D and Management Expenses:

• R&D expenses: R&D expenses for the second quarter were 2.6 billion RMB, a year-on-year increase of nearly 90% and a quarter-on-quarter increase of 46%. The increase mainly came from stock-based compensation, with around 530 million RMB allocated to R&D personnel.
• SG&A (Sales, General, and Administrative Expenses): SG&A expenses for this quarter were 2.6 billion RMB, a year-on-year increase of over 60% and a quarter-on-quarter increase of 33%. The increase was mainly due to stock-based compensation increasing by 390 million RMB allocated to SG&A.

③ Net Profit: The company's net loss for this quarter was 1.8 billion RMB. Non-GAAP net loss, excluding equity incentives, was 865 million RMB, meaning the loss decreased by over 36% year-on-year and over 57% quarter-on-quarter.

④ SBC Guidance: SBC expenses for this quarter were 940 million RMB, with an estimated full-year SBC of 1.1-1.2 billion RMB.

⑤ Capital Expenditure: CapEx for this quarter: 680 million RMB. CapEx for the first half of the year: 1.1 billion RMB, in line with the guided target of 1.9-2.1 billion RMB for the full year.

⑥ Cash Flow and Cash Position:

• Operating Cash Flow: Operating cash flow for this quarter was a positive 1.5 billion RMB.
• Free Cash Flow: Free cash flow was a positive 890 million RMB.
• Cash Balance: As of June 30th, cash, cash equivalents, and restricted cash balance exceeded 8 billion RMB.

2.2. Analyst Q&A

Q: Will the large SUV model to be launched next year adopt a plug-in hybrid platform? Can management share more about the future model plans, especially whether existing models will introduce plug-in hybrid versions? What sales proportion does the company expect for plug-in hybrid models? After ZEEKR completes the layout of pure electric and plug-in hybrid models, will there be overlap with the Lynk & Co brand in target markets?

A: This year, our product line has undergone significant updates. Models 001 and 007 were fully upgraded in August, while model 009 was launched in July. We have also introduced two new models, 7X and Mix, expected to be delivered by the end of September and in the fourth quarter respectively. These new products will drive sales growth.

Looking ahead to next year, we will launch a large SUV in the fourth quarter, equipped with pure electric and super electric hybrid systems. The super electric hybrid technology combines the advantages of pure electric, plug-in hybrid, and extended-range technologies to meet various needs in driving experience, energy consumption, and range. With 30 years of engine and transmission technology accumulation, we are confident in implementing this technology. This model will target the global market and aims to disrupt the global large luxury car market.

Additionally, next year we will introduce a new hunting model based on the 007 architecture, applying the technology of the 001 model to this slightly smaller model to continue ZEEKR's excellent reputation in the hunting vehicle market. We look forward to these innovative products meeting market demands and driving our sales growth.

Q: With the launch of pure electric, extended-range, and plug-in hybrid cars, will these products overlap with other brands within the group, such as Lynk & Co, in the target market? If there is market overlap, how will we leverage our strengths to address this situation?

A: Firstly, there is no conflict between us and the Lynk & Co brand. We have an internal Brand Management Committee that rigorously manages each brand under our company to ensure there is no product overlap. Secondly, from a brand positioning perspective, ZEEKR is positioned as a high-end luxury brand, while Lynk & Co is known for its individuality and trendiness, positioning itself as a mid-to-high-end brand. Therefore, both brands have their own unique characteristics at the brand level. Thirdly, our large SUV is a product developed based on the vast architecture, and the high platformization and generalization characteristics of this architecture help maximize cost efficiency.

Q: Does the management team still adhere to the sales target of 230,000 vehicles by 2024? Given the potential pressures in the third and fourth quarters, is the management team still confident in this target?

A: We remain confident in achieving the sales target of 230,000 vehicles for the full year 2024. Despite the pressures, we expect to deliver approximately 25,000 vehicles per month from September to December.

Q: What is the latest order trend for the new products 009, 001, and 007 launched in July and August? Can you provide some detailed information?

A: We have upgraded models 001, 007, and 009, and the media feedback on the product launch strategy has been positive. Our order volume continues to grow, with an expected increase of over 30% for these three models. As new models are introduced, the factory is also increasing production capacity, and we anticipate a month-on-month sales growth of over 20% this month. Following the launch of the new models last week, the number of potential customers and test drive applications surged, with a 30% increase in order volume and improved conversion rates. This sets a solid foundation for this year's sales volume.

We plan to launch two new models at the end of the year, ZEEKR 7X and ZEEKR Mix. Deliveries for 7X will start in September, and we are confident in its market competitiveness; innovative ZEEKR Mix deliveries will begin in October. These two new models will support our sales growth at the end of the year. After two years of global market expansion, overseas sales are expected to significantly increase in the fourth quarter In July and August, we upgraded our car models, and in September and October, we will launch new products to ensure outstanding performance during the traditional sales peak season in China.

Q: In the second quarter, the gross profit margin of the battery and other component sales business reached 20%, far exceeding the conventional level. What are the reasons for this high gross profit margin? Can we expect this trend to continue?

A: In the second quarter, the revenue from battery and component sales reached 5.3 billion, a year-on-year increase of 36%, but a 16% decrease from the previous quarter, mainly due to a decrease in domestic battery module sales compared to the previous quarter. The gross profit margin in the second quarter rose to 20%, mainly due to lower supplier costs. The overall gross profit margin of this department in the first half of the year was about 12% to 13%, and it is expected that the gross profit margin of the battery and component business for the whole year will be maintained at 10% to 12%. The temporary increase in the gross profit margin of this department in the second quarter is expected to stabilize.

Q: In the next one to two years, considering the continued price competition in the domestic new energy vehicle market, besides utilizing economies of scale, what other strategies do you think can effectively reduce costs and increase gross profit margins?

A: In the fiercely competitive landscape of the new energy vehicle market, we are implementing a series of strategies to reduce costs and drive company development.

1) Firstly, we are achieving scale production through a vast architecture to improve and maintain a good gross profit margin. We believe that the third and fourth quarters will maintain or even increase.

Scale production is reflected in our manufacturing where we apply Geely's existing production capacity, which gives us a cost advantage in our OEM business.

2) In vertical integration of the industrial chain, especially in self-developed three-electric technologies (battery, motor, electronic control), including our own silicon carbide chip, we also have self-developed qualifications. In terms of intelligence, we have achieved full-stack self-development, significantly reducing key hardware costs. We also design our own hardware and partially outsource production.

Vertical integration of the industrial chain also has scale effects, such as supplying to other brands, such as Smart, Volvo, and many other brands.

3) Finally, through internationalization strategy, the gross profit margin is higher than the Chinese market.

Q: Does the company plan to adopt innovative methods such as end-to-end solutions or pure visual technology to further reduce costs through technological means?

A: We are committed to advancing autonomous driving technology, especially the development of end-to-end models. Currently, we have formed a professional team and achieved preliminary results. We are exploring two end-to-end technology paths: all end-to-end and segmented end-to-end, planning to eventually integrate them into a unified system.

Facing the potential inexplicability of end-to-end technology, we are collecting and training a large amount of data to improve system performance and establishing rules to ensure the stability of technological development. In terms of pure visual technology, we recognize the limitations of pure visual systems under specific lighting conditions (no matter how strong the algorithm is). Nevertheless, the pure visual version provided for the 007 model has received positive user experience feedback. At the same time, we are also considering LiDAR technology for its potential advantages in performance and safety. We will continue to explore technology and choose the most suitable ADAS solution for the positioning of the vehicle.

Q: On August 13th, we launched the 2025 ZEEKR 001 model equipped with NVIDIA's autonomous driving technology. We would like to understand consumer feedback on the new autonomous driving experience, as well as the impact of this technological upgrade on the brand and order volume?

A: We have received wide recognition from customers, which is reflected in the order situation, as most orders have chosen our self-developed ADAS system.

Q: What is the company's future outlook and guidance on the gross profit margin for car sales?

A: The gross profit margin target of 15% for the automotive business announced to investors earlier this year remains valid. In the second quarter of the first half of the year, we achieved a 14.1% gross profit margin for the automotive business. In the second half of the year, with the launch of the new model 009 and sales growth expected, the performance of the automotive business segment is expected to further improve.

Q: Could the management share the company's plans and allocation for Capex?

A: In the first half of this year, our capital expenditure under US GAAP was approximately 1.1 billion RMB, with 800 million used for investment in fixed assets and the remaining funds used for software and other aspects. In the second half of the year, we plan to continue capital expenditures in new store openings, battery components, and infrastructure investments, with total Capex spending expected to be between 1.9 billion and 2.1 billion RMB for the full year. The expansion of the charging network is handled by Haohan Energy Company, which is managed by us but we only hold a 30% stake, so the capital expenditure for the charging network is not reflected in our financial statements.

Q: After transitioning to the NVIDIA solution, has the company's gross profit margin increased or decreased? You mentioned that Geely has a high-quality version of NVIDIA products, will a lower-cost version be introduced in the future? If so, when is this version planned to be applied to vehicles? Will future products, especially those in 2026, fully adopt NVIDIA's technology solution?

A: Regarding the impact on costs and gross profit margin, although the cost of the NVIDIA system is higher than Mobileye, the cost of intelligent driving will be higher, but economies of scale and lower electronic costs allow us to cover the additional costs, and it is expected not to have a negative impact on the gross profit margin.

The market response to the release of ZEEKR 009 has been enthusiastic, with strong orders, which enhances our confidence in achieving the annual 15% gross profit margin target for the automotive business. Currently, ZEEKR focuses on the high-end ADAS market, using the NVIDIA system, and there are no plans to introduce a cost-effective low-cost ADAS solution for the Geely brand Galaxy under ZEEKR.

Q: Is the export target for this year still 30,000 units? Or is there an updated target?

A: The initial export target of 30,000 units set at the beginning of the year is currently under significant pressure, mainly due to increased tariffs in Europe leading to obstacles in our expansion in that market and slowing progress. Nevertheless, we are working hard to improve single-store efficiency to mitigate the impact. Despite uncertainties in the international market, our expansion plans for emerging markets other than Europe remain unchanged, and we still maintain an optimistic attitude towards the sales target of 230,000 units for the whole year. At the same time, we are prepared to make up for any shortfall in international sales through the domestic market.

Q: How will the Mobileye solution mentioned at the Geely Auto launch event develop? Compared to the NVIDIA solution, will the gap between the two widen or narrow? As the ZEEKR brand is currently small in scale, will using two different autonomous driving technology solutions weaken economies of scale? Is ZEEKR ready to control costs through platformization and scaling while maintaining two solutions?

A: ZEEKR's brand continues to carry the product line with Mobileye technology on the 001 model (the 25-year entry-level version still carries the Mobileye chip), promising continuous product iteration and maintenance for users both domestically and internationally to ensure a responsible corporate image.

The Mobileye solution has demonstrated its superiority in the international market, complying with laws and regulations as well as privacy data protection requirements in multiple countries, making it very well-suited for the international market.

By combining domestic and international market demands, we can achieve economies of scale. At the same time, as a strategic partner of ZEEKR, Mobileye continues to increase its investment in the project. As cooperation deepens, the synergy between both parties improves, and cost inputs will also decrease accordingly.

Q: As a high-visibility sub-model in the mainstream SUV market, how should the market performance of ZEEKR 7X be evaluated? Does the high popularity of MIX, a model that made its first appearance in the domestic market at the Beijing Auto Show, indicate its market potential? Should the market outlook for ZEEKR MIX be seen as a niche sub-model targeting a niche market, or is there a possibility for it to become a dark horse that exceeds market expectations?

A: ZEEKR brand adheres to the concept of innovation and technology-driven development, focusing on developing high-end luxury models and pursuing market differentiation. With its innovation, the MIX model not only optimizes user experience but also strategically positions itself for the future mobility market, possessing dual potential to meet household and mobility service needs. The high commonality platform shared with the CM1E model indicates that the MIX model is ready for Level 4 autonomous driving. Currently, ZEEKR is in deep discussions and cooperation with multiple domestic and international mobility companies regarding the MIX model.

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