Good day, ladies and gentlemen, and thank you for standing by, and welcome to the EHang Second Quarter 2022 Earning Conference Call. As a reminder, we are recording today's call. Now, I will turn the call over to Julia Qian, Managing Director of The Blueshirt Group of Asia, EHang IR firm. Ms. Qian, please proceed..

Hello, everyone. Thank you all for joining us on today’s conference call to discuss the company’s financial results for the second quarter of 2022. The earnings release is available on IR website as well as from Newswire services. 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; 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 translation. All translation is for convenience purpose only.

In the 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 provision of the US Private Securities Litigation Reform Act of 1995.

Forward-looking statement involves inherent risks and uncertainties. As such, the company’s actual results maybe materially different from the expectations expressed today. Further information regarding these and other risks and uncertainties is included in the company’s public filing 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 the numbers present are in RMB and are for the second quarter of 2022, unless stated otherwise. With that, let me now turn the call over to the CEO, Mr. Hu Huazhi. Please go ahead, Mr. Hu..

[Foreign Language] Thank you, operator, and Julia. Hello, everyone. Thanks for joining our earnings call today. In Q2, we have actively adapted to the macro environment at home and abroad. The world was gradually recovering from the continued impact of the COVID pandemic. We were able to achieve excellent results.

In secure environment, we not only spend more time and efforts to strengthen ourselves, but also continue to expand our orders, preorders, deliveries and customers, especially in China and Southeast Asia. This drove up our total revenue in Q2 by a significant increase of over 150% from Q1.

We continued to expand our strategic partnerships with business and finance partners, such as the C.P. Group, one of the largest commercial companies in Thailand and the Agricultural Bank of China. These partnerships will be of strong support to EHang's long-term business development in the future. Our COO and CFO will elaborate on them later.

The most important thing for us at present is the EHang 216-S airworthiness certification, and the process has progressed into new faces since this year. It is based on our full understanding of the comprehensive set of AAV Type concepts that have been summarized by the Western countries with their experience in recent century.

This set of concepts has been embedded in the entire process of making an aircraft from design to mass production, which has an essential and profound influence on the safe production and operation of aviation products.

Here, I would like to express my sincere admiration and appreciation to the pioneering predecessors who contributed to the available experience with tremendous efforts. However, before the CAAC issued special conditions, there hadn't been any available airworthiness certification standards applicable to this new type of aircraft, like EH-216.

In the early days, RADs conform to our own safety standards based on which we explore to start productization and production. As there was no precedent, we have closely worked with the CAAC to further develop this new type of airworthiness standards together.

According to the relevant airworthiness concept and the certification principles in the past several months. We had established a aircraft design and production management systems, which not only meets the requirements of the aviation industry, but also are compatible with our own management system.

With that, every member of our team can work in line with this concept and conforming to the scientific management and the design methods, so as to enable every process in a controlled and regulated manner from design to production of EHang 216.

In this regard, we finally reached a consensus with the CAAC expert team in Q2 on our project to specified certification plan and the certification basis, as well as the certification plan, respectively.

In respect of the airworthiness process with this unique unmanned aircraft system, we have now only referred the CCER23 airworthiness regulation and internationally recognized standards such as the AACM, SAE, RTCA, MAL [ph] , et cetera.

And learned from the configuration management and airworthiness experience of conventional aircraft OEMs, but also made innovation exploration on new topics in unmanned aircraft systems including the unmanned system, Datalink and ground control system. We worked out 13 years of compliance applicable to EHang 216.

Based on our previous experience, we are continuing carrying out internal tests according to the airworthiness standards and the planning activities for the demonstration of compliance.

Based on the CAAC and Guangdong provincial government's strategic corporation framework agreement for civil aviation development in Guangdong, the recently emphasized on speeding up, developing the aviation manufacturing industry and new business forms of general aviation.

Both the CAAC and Guangdong government have clearly put pushing forwards relevant UEM pilot project and strongly pushing forward EHang 216-S AAV type certification process, as there are key tasks in 2022. It encouraged us and further enhanced our confidence to obtain the type certificate.

Moreover, in June, the CAAC newly established an aircraft witness branch center in Guangzhou, where our headquarters is located to be in charge of the airworthiness certification work for a small aircraft nationally.

Currently, the VT-30 one of the products in our eVTOL aircraft series is at the stage of the product design in with this preparation and component verification. We believe that these favorable conditions and policy support in Guangdong can lay a solid foundation for VT-30 design, cash light and airworthiness certification.

Next, I will turn the call over to our Chief Operating Officer, Mr. Fang Xin for business highlights in Q2..

[Foreign Language] Here's the translation of Mr. Frang's remarks. Thank you, Mr. Hu. Hello, everyone. As the COVID situation in China have gradually stabilized since Q2 of this year, the tourism market has been recovering steadily.

The post pandemic era expediated the transformation of tourism, such as in parts by bringing innovative business models to scale up the emerging consumption.

In June this year, the CAAC issued the 14th five-year special plan for General Aviation Development to promote the development of low altitude flight tourism, by supporting related authorities to expand areas sizing in more scenic spots and to establish a low altitude of flight tourism network connecting scenic spots, resorts, theme parks and other tourist destinations.

Under the national policy of supporting integrated development of aviation and tourism, we formed a strategic partnership with Tianxingjian Cultural Tourism Investment Company, an affiliated enterprise of the Jishou city government in China's Hunan Province with the plan to develop a scenic flight project at Aizhai Wonder Tourism Area, a National 5A level scenic spot in Jishou.

In Q2, we delivered five units of EHang 216 AAVs for the customers initial purchase order and initiated trial flight operations in Aizhai. The customer plans to purchase additional 25 units of EHang 216 in the future.

This project creates a replicable public and private business corporation model for low altitude flight tourism, which is helpful for expanding our ongoing business project in other regions.

According to statistics, China has more than 300, 5A level scenic spots and over 4000 4A level scenic spots, indicating tremendous market potential for expanding low altitude flight tourism. Against this backdrop, we are making excellent progress in our 100 Air mobility route initiative.

So far, more than 5,700 operational trial flights of EH216 has been conducted in practical area sightseeing scenario at 11 operation spots in China.

After obtaining the airworthiness certificate, EHang 216 is expected to provide our tourism customers and end users with a unique, safe, technologically advanced, cost effective and pleasant low altitude flight tourism solution and experience.

In Southeast Asia, where the EHang market is also in high demand and has reached use cases, we are actively expanding our presence through the empowerment of local partners.

In Q2, we received a preorder for 100 units of EHang 216 AAVs from an Indonesian aviation company, Prestige Aviation, which is the largest preorder we have received in Asia so far.

We've also reached a strategic cooperation with CP Group, one of the largest Conglomerates in Thailand, with an intent to establish a joint venture by introducing EHang AAVs to Thailand.

The two parties also intend to carry out comprehensive cross sector corporations in aerial tourism, aero-logistics and transportation, urban mobility and smart city management in the future.

We expect the size of a business recovery in the second half of this year as we are actively adapting in the macro environment, continuing moving forward on EHang 216 certification, securing more product orders, and expanding our regional aero media business in the Europe market.

We remain confident in our growth potentials and long-term outlook given our core values and unique advantages. I will now turn the call over to our CFO, Richard Liu, for financial results. Richard, please go ahead. Thank you..

Thank you, Xin, and hello, everyone. Before I go into details, please note that all numbers presented are in RMB and are for the first 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. In the second quarter of 2022, our strategic shift towards an urban air mobility platform continues as we aim for a solution and operational service integrated model.

The ongoing efforts are yielding positive results with increasing deliveries in China and orders or preorders in Asia, reflecting our solid business strength.

As we continue to focus on the EHang 216 Type Certification process, we also made further development in our 100 Air Mobility Routes Initiative, with continuously increased operational trial flights as well as expansion of operation spots in China.

Additionally, we struck a strategic partnership with the Agricultural Bank of China Guangzhou Branch for RMB1 billion indicative credit facilities to support our strategy execution and the business growth in the following years. In Q2 of 2022, total revenues were RMB14.6 million, representing an increase of 152.5% from RMB5.8 million in Q1.

This was along with a 166.7% increase in EHang 216 AAV deliveries in Q2 to eight units from three units in Q1. Demand for our AAV products have been increasing both in China and internationally.

One typical example in China is that in Q2, we delivered five units of EHang 216 AAVs, to a local government-backed tourism operator in Hunan province for areas like sting operational services. The customer plans to buy additional 25 units as the project progresses.

Another example is that we have obtained preorders of up to 210 units from customers in Japan, Malaysia and Indonesia since the beginning of this year, and we see the trend of further expansion in Southeast Asian markets. Additionally, we were able to further drive a 4.6 percentage point expansion in gross margin to 67.1% in Q2 from 62.5% in Q1.

Even though our overall gross margin has already been at a high level compared to other new energy mobility products companies, such as electric car companies. This continues to show our competitive edge as the first mover in the global UAM and EV to industries.

In Q2, our adjusted operating expenses, which are operating expenses excluding share-based compensation expenses, were RMB63.4 million compared with RMB46.1 million in Q1.

The increase was mainly attributed to continuous R&D of new AAV models and the ongoing EHang 216 certification process, both of which are progressing steadily and professional service fees related to annual report filing and other legal matters and additional provisions for accounts receivable in light of impact from the ongoing COVID-19 epidemic and the control measures in China.

With that in Q2, our adjusted operating loss was RMB51.2 million compared with RMB41.7 million. Our adjusted net loss was RMB50.8 million in Q2 compared with RMB40.9 million in Q1.

Our balance sheet remains solid with RMB240.7 million of cash, cash equivalents, restricted cash, and short-term investments as of the end of Q2, even with the slight increase of RMB3.8 million quarter-over-quarter. With that, we believe our business is on a good track. That concludes our prepared remarks. Let's now open the call for questions.

Operator, please..

Ladies and gentlemen, we now begin the question-and-answer session. [Operator Instructions] The first question is from Tim Hsiao. Please go ahead, your line is open..

Hi, management team, thanks for taking my questions. I actually have two quick questions. The first one is we saw EHang having been making some good progress in terms of their customer acquisitions, especially in Asia over the past few quarters.

Just wondering how many preorders we've got so far and when do we plan to start the delivery? In addition, could you also get some updates regarding our collaborations with the government? And what kind of size of the contribution should we expect and when do we think that’s going to kick in? And my second question is about the funding the investments because we noticed that we have the partnership with the Agricultural Bank of China, and that entitle us to around 1 billion indicated credit facilities.

Just wondering how we are going to use that? And how you're going to accelerate investments in upcoming months? And what kind of cash flow rate do you have -- does it look like now? So, could you share a little bit more information about our investment plan in upcoming quarters? Thank you..

Thanks for your questions. Please give us a second to translate your questions to the management team. We will provide answers with the translation later. Thank you. .

Hi, Tim, this is Fang Xin. Let me take your first question about orders. Since the beginning of this year, we have received a total of 210 units of pre-orders for passenger-grade AAVs in the Asian market.

More than 200 units of pre-orders in Asia are expected to be delivered in about three years, subject to customer needs and our obtaining a type certificate in China or other relevant certification in the local market.

In addition to the preorders, we also have received some customer orders, both enhanced or discussions, which are able to be quickly delivered in the short time based on the customers' demand.

For example, in Q2, we received the orders from the customer in Jishou, and also completed the deliveries for the first batch of 5 units which have already been put into trial operations. At present, we are in talks with some local governments regarding Prudential Corporation [ph] and the plans to set up operational centers in different regions.

In order to actively prepare for the commercial operations once we obtain the types [indiscernible] we have already signed a strategic cooperation agreement with certain governments.

Upon this agreement, there will be some purchase orders, which plans to be completed successfully within this year and expect to make a notable contribution to our full year results..

Hi, Tim, this is Richard. I will take your second question. Basically, this partnership is the first time that Agricultural Bank of China is one of the largest commercial bank to partner with and grant such indicated credit facilities to us as an innovative EVECO [ph] technology company.

This represents traditional financial institutions have started to tap into this type of new industry. So it is a good sign, not only for Ehang, but also please for the industry.

Basically, the RMB1 billion indicated credit facilities cover comprehensive banking products and services of Agricultural Bank of China to support our operations and business development over the following years, including regular credit loans, financial leasing, supply chain financing, et cetera.

So as the starter they have extended to us a RMB30 million credit loan. Further, we have been discussing the financing -- our financial leasing option to facilitate our business growth after the TC is obtained. Thus, in the near-term, money will be used more towards supporting operations and the sales growth.

In respect of investment in terms of CapEx investment, so as we have an existing production facility, we will see how the sales would grow to plan for any future CapEx needs. Regarding the cash burn, as you know, EHang has been running a lean operation in China, and this is somewhat EHang’s unique start if compared to others.

You probably can get a feeling from our cash flow statements. If you ask for current level to give you a rough idea, the current average monthly cash run rate of our operations is around RMB17 million or roughly US$2.5 million if annualizing it, you would get around RMB200 million or roughly US$30 million.

As it is expected that sales would increase after the TC is obtained, the operational cash flow or the cash flow situation is expected to be further improved following that. Hope this answers your question..

Thank you very much Mr. Fang and Richard for detail story. Thank you..

Thank you for your question. Next question..

Please standby. Let's take our next question from Lu De. Please go ahead. Your line is open..

Thank you. Thank you for taking my questions, and I have two questions as well.

The first one is could the management team elaborate a little bit more on the business model for the AAV for the tourist attraction, corporation? Like, for example, will the tourist attraction be leasing or buying the AAV from EHang or who will be operating the AAV and such? And for a second question, now that we've seen that there are many competitors now in the making of AAV, what would the management team feel if the most important innovation to stay as a industry leader, for example, like battery or noise cancellation technology or propeller technology, or like having a command control center, like what will be the most crucial? How is EHang doing in that particular area? Thank you so much..

Thanks for the question. Please give us a second for translation..

Of course. .

[Foreign Language] Hi, Lu De. This is Fang Xin. I will take your questions. The demand and the business model for aero sightseeing into next month have invested for a long time.

The traditional ways including the cable cars and helicopters, which cannot only provide a tourist with a fresh aero sightseeing experience, but also serve as a point-to-point transportation vehicles in scenic spot which are favored by both tourists and scenic spot operators.

[Foreign Language] Fiber, now traditional ways had certain limitations, such as the high costs and expenses for infrastructures, the aircraft acquisition and maintenance and professional pilots. Therefore, the scenic spot operators cannot have a good return on investment.

[Foreign Language] The key innovation of our AAVs is that they are designed for the multiple use cases, with features of high safety, efficiency and the low-cost operations reflected in our aircraft structure and full redundancy safety design and the fleet management.

In terms of the aerial tourism, the EHang can realize stable flight in low altitude based on our moderator structure, and it can be essentially monitored and managed. And with more it saves the high cost of hiring professional pilots. [Foreign Language] The scenic spot as our customers can purchase or lease our AAVs.

We're only providing infrastructures for qualified operators, who can take charge of flight monitoring and our operational sport. [Foreign Language] EHang provides both the AAV sales and the UEM operational services to our customers, taking our partnership with decal customer as an example.

In Q2, our customer not only placed the purchase order for the EHang 216, but also plans to work with us to develop a Scenic Flight Project at Aizhai Wonder. It's a national way 5A level scenic spot in Hunan through both parties' complementary resources and the joint operation.

[Foreign Language] Regarding your second question, as a industry leader our autonomous technologies our leading competence in the AAV industry, while other competitors are still at the stage of command and control.

In terms of autonomous technologies, we have invested all our efforts from day one, including flight control of algorithms, the flight lift systems and battery systems and also the command and control systems, altogether integrated our unmanned aircraft system.

With continuous iteration and evolution of these technologies, we are able to stay ahead in the industry. That's the answer to your questions. Thank you..

Thank you so much..

Operator:.

.:.

[Foreign Language] Let me translate quickly here. I have two questions. First, on the technology. Any differences in the entry barrier across the logistic firefighting and also the passenger AAV? And can these different products share the same production line? And what's the roughly unit level to breakeven? My second question is on safety.

Could we take over the flight or if any emergency happens? And if hackers paralyze the system, what can we do to let the AAV safely landing? Thank you..

Hi, Verena. This is Richard. Thanks for your question. Let me try to answer your questions. So basically, our 216-L, the logistic model 216-F, the firefighting model are essentially within the -- we call it the 216 series of products.

Basically, our approach has been to first, focus on developing a fundamental model for passenger carrying use, which is the corresponding model is 216-S. It requires large payroll and the highest safety level and then further develop 216-L and 216-F on top of the fundamental model based on different specific needs.

The core modules such as flight control, propulsion, et cetera, are the same actually. The relevant functional parts are tailor-made to shoot for different needs. With that, I guess, you probably can tell now the intertribal was due to be -- on the core technology part, which are shared and require a large amount of time and manpower to be developed.

As to the production line, it can also be shared. In respect of breakeven, we can look at them as a whole.

To give you a rough idea, it is estimated that annual sales of roughly -- to give you a rough range of around 250 to 300 units of 216 series of products, could carry the company to breakeven on an adjusted basis, given the current levels of expenses and prices.

And regarding your second question, so basically, our AV flies by itself along the predetermined flight routes in normal situation. In case of emergency, the AV usually can deal with the situation by itself.

Having said that, it's necessarily the ground operational staff, who are monitoring the flight and take over the control through the ground command and control systems.

In respect of your hedging question, the connection between the AV and the command control system is through weather's private network and separated from the public network, and there are high-level several security protection measures.

So in case, the ground command control system will be hacked, the AV can still fly by itself to complete the predetermining flights or find the nearest safe area to land. Hope I answer your question. Thank you..

Thank you, Richard. It's very clear. Thank you..

Thank you for your question. There are no further questions. I will now hand the back conference over for closing remarks. Please go ahead..

Thank you, operator, and thank you all for participating on today's call and for your support. We appreciate your entry and see you again next quarter on our progress..

This conclude the conference for today. Thank you for participating. You may all disconnect..