EHang Holdings Limited (NASDAQ:EH) Q3 2022 Earnings Conference Call December 2, 2022 8:00 AM ET
Company Participants
Hu Huazhi – CEO
Fang Xin – COO
Richard Liu – CFO
Conference Call Participants
Jiahui Wu – Goldman Sachs
De Lu – Tianfeng Securities
Operator
Good day, ladies and gentlemen. Thank you for standing by. And welcome to the EHang Third Quarter 2022 Earnings Conference Call. As a reminder, we are recording today’s call.
Now, I will turn the call over to [indiscernible], EHang Senior Director of Investor Relations. Ms. Chi, (ph) please proceed.
Unidentified Company Representative
Hello, everyone. Thank you for joining us on today’s conference call to discuss the company’s financial results for the third quarter of 2022. The earnings release is available on the company’s IR website. Please note, the conference call is being recorded and the audio replay will be posted on the company’s IR website.
Today, EHang’s management team, which include Mr. Hu Huazhi, Chief Executive Officer; and Mr. Xin Fang, Chief Operating Officer; and Mr. Richard Liu, Chief Financial Officer, 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, the management team’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 involves 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, all numbers presented are in RMB and are for the third quarter of 2022, unless stated otherwise.
With that, now let me turn the call over to our CEO, Mr. Hu Huazhi. Please go ahead, Mr. Hu.
Hu Huazhi
[Foreign Language]
[Interpreted] This is the English translation of the CEO’s remarks. Hello, everyone. Thank you for joining our earnings conference call today. Since EHang submitted the EH216-S Certification application to the CAAC, which is the Civil Aviation and Administration of China at the end of 2020. We have been continuously committed to the efforts to actively promote EHang 216 certification progress in the past two years.
In airworthiness certification, it’s not only a safety certification and pre-requisite for official commercial aircraft operations, but also the crucial path for EHang to move forward in its strategy of becoming an Urban Air Mobility platform operator and thus the key catalyst and the driving force for the company’s business growth.
Here, we’d like to thank our investors, customers, regulators and partners for their long lasting attention and support. Every member of the EHang team value the support given to EHang and are wholly dedicated to meet the expectations of our stakeholders.
As an innovative project, the airworthiness certification process is full of tremendous challenges along with the continued impact of the pandemic in China. Our technology, product and the certification teams have tirelessly worked days and nights to overcome difficulties in a collaborative synergy. Additionally, they have walked to enter close cooperation with the CAAC expert team and we are about to greet the victory [indiscernible].
At present, all of our certification plans has been officially approved by the CAAC expert team. In other words, the means of the compliance for all the trial specified airworthiness review subjects have been confirmed. Including aircraft, their performance and flight, structural strengths, design and configuration, ground control station, airborne human-computer interaction, continued airworthiness, etcetera.
As a result, the EHang 216 certification process has already completed the phases of Concept Design, Requirements Definition, and Compliance Planning and incurred the ongoing final phase for Demonstration and Verification of Compliance. We have completed in the most demanding and complicated work across the most difficult obstacles and overcame many challenging uncertainties.
What we are doing next is to implement all the plans that we made. Besides, we are fully confident in the final phase of airworthiness certification, which is specifically about conducting verification reviews through laboratory tests, ground tests and inspections, flight tests, and data analysis that is CAAC expert team in EHang, in accordance with the approved certification events.
EHang 216 have accumulated more than 30,000 safe flights and data records over the years, which could be solid support to the demonstration of compliance. The proof of passenger-carrying AAV test drive records as well as the test flight in extreme weather environment such as the high altitudes, typhoons, deserts and heavy fog. We have accelerated the process of a verification of the compliance.
On this basis, we are carrying out some supplementary test and a flight test for verification, so as to complete the type certification process. We are fully confident to complete the world’s first airworthiness certification for the human-carrying unmanned aircraft system.
Our confidence is not only derived from strengthen innovation our AAV technologies, but also from the open and innovative spirit of the Chinese government, the CAAC and the aviation industry, as well as their interest, support and guidance. All of these empowered the high degree of innovation, breadth, deeps and a speed of the EHang 216 certification project, which are at the forefront of the emerging industries across the globe.
In September and November this year, EHang was honored to be invited by the ICAO, which is the International Civil Aviation Organization to attend the 41st ICAO Assembly, Innovation Fair and RPAS Symposia at ICAO’s headquarter in Montreal, Canada and shared the exploration and practice on EHang 216 airworthiness certification project and innovative results with global aviation regulators.
In particular, the CAAC as the first class member of ICAO introduced the China’s first airworthiness certification standard for human-carrying unmanned aircraft system at the ICAO Assembly, providing a reference for countries in formulating related regulations. It is not easy to be a first mover and a pioneer. Even so, over the past eight years, EHang has always been committed to its steadfast emission, which is to make safe, autonomous and eco-friendly Air Mobility accessible to everyone.
So this, we have and always will adhere to the principles of safety first boarding innovation, careful analysis and prudent verification, contribute to the formulation of relevant industry standards and norms, with the experience and the expertise we have accumulated over the years and lead healthy and continuously improving development of the emerging eVTOL industry worldwide.
Meanwhile, driven by leading innovative buyers like EHang, we are pleased to see that China has taken more and more new policies and measures to continuously support and promote the development of Urban Air Mobility and Unmanned Civil Aviation. In August, the CAAC released the Unmanned Civil Aviation Development Roadmap 1.0, which set the short, medium and long term development stages and goals for 2025, 2030 and 2035. These are significant in how they clarified the direction for the new industry development.
Meanwhile, the CAAC also proved the seven new Unmanned Civil Aviation experimental zones in addition to the first batch of 13. Currently, there are a total of 20 pilot cities in China to put the policies into actions. In some of these zones, EHang received a strong support and preorders from the local government and customers. We are actively building UAM operational trail pilot basis and supporting infrastructures to bring the integrated development of air [indiscernible], air logistics and smart city management industries as well as provide further grounds for the operations and practical applications of EHang AAVs.
And like other development industries, we need to create new regulations to build up this new industry and we made it, which expect to be followed by explosive growth. Against such a strong and promising backdrop, we have the reasons and confidence that EHang will achieve significant growth results and meet our strategic goals after completing a diversification to provide a better returns for our shareholders and partners, while continuously promoting their sustainable development of the emerging UAM industry.
Next, I will turn the call to our Chief Operating Officer, Mr. Xin Fang, for business results in Q3. Thank you.
Fang Xin
[Foreign Language]
[Interpreted] This is the English translation of the COO’s remarks. Thank you, Mr. Hu. Hello, everyone. In the third quarter, we remained focused on EH 216 and airworthiness certification project and continued to explore domestic and overseas markets to fully prepare for post-certification commercial operations. Since
October, the COVID-19 resurgence has a swap of course many cities across China, especially Guangzhou, where EHang is headquartered. Although, we are facing serious challenges from pandemic control measures, we will continue to drive our efforts in a low altitude aerial tourism, when our AAV targeting markets following Guangzhou City in Guangdong Province, and the Jishou City in Hunan province.
Since the third quarter, we have been exploring more potential opportunities in Qingdao City in Shandong Province and the Huangshan City in Anhui Province and integrating local resources to actively develop a broader and diversified UAM ecosystem. EHang formally launched the 100 Air Mobility Routes Initiative last year. So far, we have completed over 6,800 operational trial flights with EH 216 in practical aerial sightseeing scenarios at 15 operation spots across China, to accumulate valuable experience for post-certification commercial operations.
These operations spots cover first-tier cities such as Guangzhou, Shenzhen and Shanghai, as well as other tourist destinations. In addition, EHang self-developed AAV operational system has been put into use across all operation spots. The current internal test demonstrated positive results, which will significantly improve AAV operations management efficiency.
In October, we established our partnership with HAECO Group, a subsidiary of Swire Group. HAECO Group brings over 70 years of experience in maintenance, repair and overhaul and as aftersales maintenance service system and network across the globe. We believe that the potential cooperation opportunities in manufacturing and assembly continued airworthiness, digital platforms, aircraft maintenance and talent training will have further solidified foundation for EH216 commercial operations in the future.
On the international front, we have made meaningful progress in two key regions, Asia and Europe. Since the beginning of this year, we have achieved the fruitful results in developing Asian markets, including Japan, Malaysia, Indonesia and Thailand. And have received a total of 210 pre-orders for passenger grade AAVs. In the third quarter, with the support of our Japanese customers EH216 completed a demo flight tour across four cities, leaving footprint in up to six Japanese cities to date.
This flight tour not only demonstrate the use cases in aerial sightseeing over the sea, and mobility and smart logistics, but also include the over the sea flight and point to point flight for the first time of an eVTOL aircraft in Japan. It was also an excellent showcase for participation opportunities at Expo 2025 Osaka, Kansai, which will further strengthen preparations for subsequent business expansion in Japan.
Furthermore, EHang played an important role in many European Union’s UAM projects. For instance, the EH216 trail flights in October verified and validated the UAM concept of our operations, which completed the AMU-LED project objectives. In November, EHang participate the SAMVA project initiated by the European Union Agency for the Space program to deployed the EGNOS, which is the European Geostationary Navigation Overlay Service of the EH216 operations and to support use space integration across Europe.
2022 is coming to an end, but we continue to see impact from the COVID-19 resurgence and a pandemic control measures in China, which brings considerable challenges to our original airworthiness certification process and a business development plan. We have adjusted our guidance based on the current situation and the outlook for the fourth quarter.
The company expected total revenue for 2022 to be in the range of RMB55 million to RMB65 million. Nevertheless, remain optimistic and confident about achieving the company’s long-term financial growth and the development momentum based on our core competencies, including the leading technological advantages, EH216-S TC process entering the final phase, and increasing UAM marketing demand with preorders for more than 1,200 passenger grade AAVs in hand, and sufficient preparation for commercialization and industrial chain deployment and also favorable regulatory support, especially in China. Based on that and our consistent execution of the corporate strategies, EHang is well positioned for a promising future.
I will now turn the call over to our CFO, 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 are for the third quarter 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. Our third quarter performance reflects impacts from the COVID resurgence in China. However, it continue to enhance our cost management to improve operational efficiency despite these near-term challenges. We maintain our focus on the development of areas that can deliver long term growth as we continue to execute our strategy towards becoming an integrated Urban Air Mobility operator.
Turning to our operating results in Q3 2022. Total revenues were RMB8.2 million compared with RMB14.6 million in Q2. This was due to the unfavorable market impact, mainly from the pandemic resurgence and related control measures in China. The EH216 AAV delivers in Q3 were 4 units compared with 8 units in Q2. That said, demands for AAVs remained strong, notably with preorders from the Southeast Asian market this year.
As we are focusing on completing the final phase in the Type Certification process of EH216-S. We are also stepping up our efforts in preparing for its commercial operations by expanding our market presence and our partnership network at home and broad, coupled with other strategic initiatives.
Gross margin was 65.9% in Q3, a slight decrease of 1.2 percentage points from 67.1% in Q2, but it remains at a high level compared to those of other new energy mobility products such as electric cars. These are tests to see EHang competitive strengths and fresh mover advantages in the global UAM and eVTOL industries.
In Q3, our adjusted operating expenses, which are operating expenses excluding share-based compensation expenses were RMB59.7 million representing an improvement of 5.9% from RMB63.4 million in Q2. The decrease was mainly attributed to decreased professional expenses as well as fluctuated R&D expenses related to different processes in product development and the ongoing certification process.
With that in Q3, our adjusted operating loss was RMB52.9 million compared with RMB51.2 million in Q2. Our adjusted net loss was RMB55.1 million in Q3 compared with RMB50.8 million in Q2. As for our balance sheet, we continue to maintain relatively healthy cash, cash equivalents, restricted cash and short term investment balances of RMB208.8 million as of the end of Q3, which was attributed to our continuous management of operating expenditures and cash flow.
Additionally, we will be moving to a new headquarter office in Guangzhou to embrace the new phase of growth that the company is expecting to see following completion of the type certification. Nevertheless, we have been sticking to a prudent cost control strategy and taking effective measures to optimize new office rental expenses. It is expected to give us a cost down estimated by around 20% compared with those of our current office.
Given the latest pandemic resurgence in China, we expect such headwinds would probably remain a challenge in the near term. But we believe that for the longer term, we will be able to capture the great growth potential of the UAM industry with a leading technologies and comprehensive strategies. We remain committed to providing a safe autonomous and sustainable and mobility experience, while creating values for our shareholders and stakeholders.
That concludes our prepared remarks. Let’s now open the call for questions. Operator, please go ahead.
Question-and-Answer Session
Operator
Ladies and gentlemen, we now begin the question-and-answer session. [Operator Instructions] The first question comes from the line of [Technical Difficulty].
Unidentified Participant
Thank you for taking (ph) my questions. I have two questions. My first question is regarding the progress of Type Certification. As we enter into more in-depth rate these days. Can we bit expand that EHang still can receive Type Certificate by the end of this year? And my second question is that in light of recent COVID lockdown, have we encounter any hiccups in terms of production, component sourcing, Type Certificate [indiscernible] and delivery schedules. And do we see any risk limit delay in timetable of resilience on TC and how should we think about the revenue cadence into 2023? Thank you.
Operator
Do we have the management in the [Technical Difficulty] in the queue? Thank you. Unmute your local line please. Ladies and gentlemen, please stand by. [Technical Difficulty] Thank you.
Unidentified Company Representative
Hello? Hi.
Hu Huazhi
[Foreign Language]
[Interpreted]
Operator
Thank you for the answer. We may have the management translation, please. Perhaps management for the translation line, would you like to rejoin again if you can’t hear us. Everyone please stand by. We are trying to address the issues. [Technical Difficulty] Okay. We can hear you now. Please carry on, please.
Hu Huazhi
As our CEO, Mr. Hu mentioned earlier, the EHang 216 Type Certification has entered into the final phase. Specifically to complete the compliance demonstration and verification work according to the certification hence approved by the CAAC expert team. The practical data that EHang has accumulated over the past few years provides a solid support. And together with the support of the CAAC and the expert team, it will help to accelerate the final phase of the process.
As we are the world’s first, we are facing a lot of uncertainties, but when it comes 216 Type Certification is one of the key projects of CAAC for this year, which was originally scheduled to complete by round out December this year. Specifically, the CAAC code for the members of the TC expert team to get together at the EHang site in [indiscernible] to work closely with us.
However, the recent epidemic resurgence in Guangzhou made it difficult for all the members across the country to come together. That’s the timetable might be delayed, but it will not be too long because most recently, as the COVID restriction measures have begun to ease by steps in China. The related impact is expected to gradually decrease. So our expectation may be around January next year. This is all about the translation of the first questions.
Operator
Thank you. Would you like to move to the next question from the investor, please?
Hu Huazhi
[Foreign Language]
[Interpreted] Okay. This is the English translation of the answers above. Regarding your second question, the epidemic has had a significant impact on our business development and the original projected trends since the beginning of this year, just like other Chinese companies.
In terms of the business development, the tourism industry is our initial main targeting markets for our AAV product applications. Well, it is one of the industry’s severely affected by the epidemic. However, we have been exploring more potential opportunities in Zhaoqing City in Guangdong Province, Jishou city in Hunan province, Qingdao City in Shandong Province, and the Huangshan City in Anhui Province, et cetera. And despite the strict pandemic inflammation, and we received adequate trust, support and cooperation from local governments and customers.
In addition, the epidemic has no significant product on our production and supply chain. And our last year’s revenue expectations both depending on the timing of obtaining Type Certificate and the recovery of the economy and the tourism industry after the epidemic situation gradually subsides in China. And ideally, the potential customers in the market above will be able to place orders while we could gradually deliver the product. So that we are likely to achieve significant revenue growth next year and return to the high growth trajectory. And for more details, please wait for our guidance next year. And this is all about the translation of the answer.
Operator
Thank you very much for the questions. Allow me to proceed with the next question. One moment, please. Our next question comes from Jiahui Wu from Goldman Sachs. Please proceed.
Jiahui Wu
[Foreign Language]
[Interpreted] Okay. I will translate for myself. Yeah. Thanks management to take my question and congratulations on the results. I have two questions. The first one is from EHang 216. Could you please share us this aircraft the pump costs breakdown, especially the battery, the model, the battery management part and who are the support [Technical Difficulty] can we take the view that this EHang model above cost breakdown is similar at the EV?
And second one is how many the preorder and the decrease we have so far? And in terms of scenarios apart from the [indiscernible], what types of passenger transportation scenarios are we penetrating to? Thanks.
Richard Liu
Thank you for the questions. This is Richard. Let me take your first question and then I will let our COO, Xin take your second question. So basically, the cost structure of the EH216 AAV can be divided into three major portions. First, the power and propulsion system; and second, the fuselage infrastructure; third, the electronic components and others. And from a new energy mobility product perspective, the major composition of the propulsion system of an EH216 AAV can be regarded similar to that of an EV. It mainly includes electric motors — motor drivers and batteries together with the battery management system or BMS.
In respect of percentage each portion as mentioned just now cost us roughly one-third of the total cost more or less. In respect of suppliers, most of our qualified suppliers whose long term relationships are those located in South China, more especially in the Per River Delta area, which known as a world leading manufacturing hub and where our headquarter is. So this give us an easy access to a large number of high quality suppliers and the competitive edge in respect supply chain, in terms of costs and efficiency as compared to our peer companies in other countries.
So I will let Xin take your second question.
Fang Xin
[Foreign Language]
[Interpreted] Okay. This is the translation of Mr. Fang’s answer. So far this year, in addition to the over 200 units of EHang AAV preorders in Asian markets. We have potential orders from many domestic customers in pipeline, such as Qingdao districts in Guangdong city, Guangxi Province, and [indiscernible] to Jishou City in Hunan Province. They are very interested in deploying EHang AAV’s in the local areas to develop the low altitude tourism industry.
And the potential orders in Zhaoqing include 60 units [indiscernible] AAVs, which are expected to be placed and delivered gradually after obtaining tax certificate. In addition, 5 units of EHang 216 has been delivered to [indiscernible] to developing an aero sizing project. And this customer intends to purchase additional 25 units as the project evolves. And apart from the low altitude tourism market, we are also in contact with the customers who have needs for firefighting and emergency transportation, such as the Qingdao fire department and some hospitals which has a potential order about 6 units of EHang 216 by our fighting model.
Given that our initial primary target market is the low altitude tourism, which we invest more resources. The revenues from this market will be the most significantly in the near future. And followed by the firefighting and the emergency aero transport use cases. This is the all of the translation.
Operator
Thank you for the answers. One moment for the next question. The next question comes from the line of De Lu from Tianfeng Securities. Please proceed.
De Lu
Thank you management team for taking my question. My first question is recently, we see that U.S. has issued a series of export bans on the high end trips. I’m just wondering, will there’ll be any potential impact on EHang supply chain? And my second question is, we noticed that China’s domestic epidemic prevention policy is experiencing some softening, especially in Guangzhou. If these policy continue to ease in the future, what will be our new outlook on the future, for example, like TC approval and market demand and et cetera? Thank you so much.
Richard Liu
This is Richard. Let me take your questions. First of all, we are not using those U.S. ban chips in our products. That’s as you can imagine, there will be no potential impact on our supply chain. But we will be mindful of this when we further implement our R&D and supply chain strategies. Additionally, we adopt a strict mechanism to review any sure quality and stability of our supply chain. And we always seek to fully engage with our qualified suppliers to establish long standing and strong partnerships.
In respect to your second question, yes, we have been experiencing the optimization or even the easing of COVID prevention and control measures recently. As you mentioned Guangzhou, where we have headquarter has initiated doing so since just two days ago. And it seems more cities gradually following the suit. So this is a very good sign to the market. Given the COVID prevention measures can be further loosened, travel can be back to normal. So when this challenges are ease or is further eliminated, it is expected to have positive impacts on the business.
For example, in respect of type certification, the inspectors will be able to travel without difficulties to allocations to conveying and check on-site thus facilitating the process. In respect of markets, you will help the tourism industry, which we initially target back to normal. Thus facilitating the relevant tourism operating customers to complete orders. So coupled with TC soon to be obtained, it is expected our business would rebound next year and we believe our efforts will allow us to capture this market growth opportunities going forward. Thank you.
Operator
Thank you for the questions. Seeing no more questions in the queue, let me turn the call back to Ms. Chi (ph) for closing remarks.
Unidentified Company Representative
Thank you, operator, and thank you all for participating on our today’s call. If you have further questions, please contact our IR team by e-mail or participate our following investor events through the calendar information provided on our IR website. We appreciate your interest and look forward to our next earnings call. Thank you.
Operator
Thank you, all again. This concludes the call. You may now disconnect.
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