Hello, ladies and gentlemen. Thank you for standing by for Lee Auto's second quarter 2026 earnings conference call. At this time, all participants are in listen-only mode. Today's conference call is being recorded. I will now turn the call over to your host, Ms. Janet Zhang, Investor Relations Director of Lee Auto. Please go ahead, Janet.

Thank you, operator. Good evening and good morning, everyone. Welcome to Lee Auto's second quarter 2026 earnings conference call. The company's financial and operating results were published in a press release earlier today and were posted on the company's IR website. On today's call, we will have our Chairman and CEO, Mr. Xiang Li, and our CFO, Mr. Johnny Tie Li, to begin with prepared remarks. Our President, Mr. Donghui Ma, and CTO, Mr. Yan Xie, will join for the Q&A discussion. Before we continue, please be reminded that today's discussion will contain forward-looking statements made under 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 views expressed today. Further information regarding risks and uncertainties is included in certain company filings with the FDC and the Stock Exchange of Hong Kong Limited. The company does not assume any obligation to update any forward-looking statements except as required under applicable law. Please also note that Li Auto's earnings press release and discomfort call include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. Please refer to Li Auto's disclosure document on the IR section of our website, which contains a reconciliation of the unaudited non-GAAP measures to comparable GAAP measures. Our CEO will start his remarks in Chinese. There will be English translation after he finishes all his remarks. With that, I will now turn the call over to our CEO, Mr. Xiang Li. Please go ahead.

Hello, everyone. I'm Li Jiang. Welcome to today's E&G phone conference. In the face of a fierce market competition and the era of car generation, in the first half of this year, ideal cars are the number one Chinese brand in the new car market with a value of more than 200,000 yuan. As our dual-power strategy continues to advance, ideal cars are more mature and the pure car model is now balanced in the third structure. Since the second quarter, the ideal R series has achieved a comprehensive transformation. Our series of core technical achievements have been launched. From the self-propelled Mach M100 cable, Mach VLU model to 800V main drive, full line control chassis, to the third-generation self-propelled turbocharger and 5C supercharged battery, all aspects of software upgrade, re-defined technology, and new standards of experience. In terms of pure electricity, Li Xian i6 has been in demand for more than 200,000 yuan for six months in a row. All models have a low sales volume. With Li Xian i6, are the leading companies in the investment market. They will further strengthen our leadership in the S&P 300,000 to S&P 300,000 market. We are also setting up an upgrade of pure electric products. At the end of July, we plan to add a long-term long-term version in the post-pandemic market, and we will increase the number of e-cigarettes in the e-cigarettes box around the problem and demand of the feedback of the users. We will also upgrade the front row of the front row of the front row of the front row of the front row of the front row of the front row of the front row of the front row of the front row of The new generation of Dream Mega is about to be launched. We have further polished its flagship design and brought the new generation of interior design, space experience, smart platform, and driving quality. The new pure electric flagship SUV Dream i9 will also be launched in mid-June, and will further perfect the pure electric products of Dream vehicles. It is expected that the order ratio of the subsequent pure electric vehicles will continue to increase. In the second half of the year, We are confident that we will be able to enter all the brands in the Chinese car market in more than 200,000 yuan. With the help of core technology, we will continue to consolidate the more in-depth supply chain and gradually transform it into user value and commercial efficiency. At present, 5C supercharger has become a necessary factor for users to choose. The ideal self-built supercharger station is one of the important competitiveness. In terms of battery, we have already realized the full-battery self-battery, including telecom, BMS, and Pike. After the self-battery motor and electric control, I made the last version of the 3D field. Through the integrated design of the whole car system and the experience accumulated on the 5C supercharger technology, the ideal car self-battery can have a leading performance in terms of quality, safety, and life. At present, the ideal car's autonomous battery has been officially launched in the new LXR8, new LXR6, and LXR8. In the next few months, all of our models will be equipped with autonomous batteries. We firmly believe that, in the long term, batteries and batteries will be the most important technological deviations and add-ons in the giant smart industry. In May, we started to deliver the entire M100 chip system of Dream Car. Currently, the delivery of the M100 chip has exceeded 50,000 pieces and maintained a good performance. In addition to the chip, we are also constantly breaking through in the development stages such as model, controller, and surface system, and gradually turning it into a product experience. In July, the overall performance of Mahoe VLA increased by 20% through OTA 9.1. and Li Cheng. Compared to the previous generation of computing platforms, the number of users has increased by nearly three times. In September, MAFA VLA has already sent users to ZOOL and AURUN. In the future, we will use the data accumulation of ideal cars to increase the capacity of MAFA M100 chips, accelerate model training, and further play the advantage of self-propelled chips. In July, the OTG.1 version will let VLA see the speed of reaction and surpass the lower level. In October, the OTG.2 version VLV will use the 3D VIT sensor in the front to see further and more accurately. At the end of the year, the OK9.3 version of VLV's model parameters will be increased, which will significantly increase the understanding and interpretation ability of complex scenarios. Faster response, more accurate, and stronger interpretation are the three most important improvements of the Mahe M100 and Mahe VLV this year. Hi everyone, this is Visham. Thank you for joining our honoring conference call today.

In the first half of this year, in the midst of intense market competition and a complete product refresh, Li Auto has remained the top-selling Chinese automotive brand in the RMB 200,000 and above EV market. The continued rollout of our dual energy strategy has resulted in a healthy product mix, with E-Refs and BEPs each accounting for 50% of total sales. Since Q2, we have updated the entire VL series, showcasing our latest technologies. Key updates include our in-house Mach 100 M100 chip running Mach VLA model, 800-volt active suspension and drive-by-wire chassis, and our third-generation range extender with 5C supercharging battery. The hardware and software upgrades set new standards for the technology and user experience once again. Turning over to our BEV lineup, the Li i6 has been one of our top three selling models priced over RMB 200,000 for six consecutive months. Li i6 and the L6 are the top sellers in their respective segments, further solidifying our leadership in the RMB 200,000 to 300,000 SUV market. Upgrades to our BEV lineup is also underway. In late July, We launched the rear-wheel drive long-range version of Li i8. Based on user feedback, we added features such as power frunk and zero-gravity driver and passenger seats. These updates bolstered our product competitiveness and translated to a notable sales uplift. The new generation Li Mega is scheduled for launch on September 2nd. We further polished its pioneering design and completely rebound the interior The Cabin Experience, Intelligent Platform, and Bike Quality. Additionally, the all-new flagship BEV SUV, the i9, will also be launched in mid-September, further enriching the auto's BEV product lineup. We anticipate BEV models to account for an even larger share of total sales over time. With new models launching and ramping up in the second half of this year, we're confident in maintaining a top three position among all brands in China's passenger vehicle market, priced above RMB 200,000. By developing core technologies in-house, we're continuously deepening our competitive note, steadily translating these technological advancements into tangible user value and commercial efficiency. 5C supercharging has become a prerequisite in user purchase decisions, and the proprietary supercharging network stands as one of our key competitive advantages. On batteries, we're able to develop cell, BMS, and pack fully in-house, completing the final piece of the electric powertrain puzzle, following electric motors and control units. Through integrated design with the overall vehicle system, combined with the technology and experience we have accumulated in 5C supercharging, we're confident that Li Auto's in-house battery will deliver industry-leading performance

Pardon me, this is the operator.

Please hold and the conference will recommence shortly. The conference is reconnected. Please go ahead.

Apologies for the breakup. To continue with the CEO's remarks, through integrated design with the overall vehicle system, combined with the technology and experience we have accumulated in 5C supercharging, we're confident that Li Auto's in-house battery will deliver industry-leading performance in quality, safety, and service life. Our in-house batteries are already deployed on our all-new Li L8, the new Li L6, and the Li I8. Within the next few months, all of our models will be equipped with our proprietary batteries. We firmly believe that batteries and chips are going to be the most critical technological barriers in the embodied AI industry. In May, we started shipping our full-stack 8F solution based on the M100 chip. To date, shipments of the M100 chips have exceeded 50,000 units, maintaining excellent quality track record. Beyond chips, we're also making R&D breakthroughs across models, controllers, and software. These achievements have steadily translated into product experience. In late July, with OTA 9.1, Overall Mock VLA performance improved by 20% and user mileage penetration nearly doubled compared to the previous generation computing platform. In September, we will also roll out Mock VLA to cards with NVIDIA, Thor, and ORNX chips. Building on the data we have accumulated, we'll accelerate model training and iterations to fully leverage the compute advantage on our chips. The July OTA 9.1 update allows VLA to match and surpass human drivers in reaction stages. The October OTA 9.2 update will enable VLA to fully adopt 3D vision transformers, providing long-range and better precision. And the year-end OTA 9.3 update will see VLA model parameters scale exponentially, significantly enhancing task comprehension and reasoning capabilities in complex scenarios. Faster reactions, sharper vision and stronger reasoning are the three most crucial upgrades for the Mach M100 and Mach VLA this year. Going forward, building embodied AI vehicles will remain at the core of our strategy. Through full-stack in-house development across hardware and software with continuous iteration Our vision is that vehicles will become true intelligent agents that can not only look after human beings, but also complete tasks independently more efficiently than human beings. With that, I'll turn the call over to our CFO, Johnny, to walk you through our financial performance.

Thank you, Lee. Hello, everyone. Given time constraints, My remarks today will be limited to our second quarter financial highlights. All figures will be quoted in RMB, unless otherwise stated. For further details, including the corresponding US dollar amounts, we encourage you to refer to our earnings price release. Total revenues in the second quarter were RMB 25.7 billion, down 15.1% year-over-year. and up 11.7% quarter-over-quarter. This included 24.1 billion from vehicle sales, down 15.7% year-over-year and up 11.8% quarter-over-quarter. The year-over-year decrease was mainly driven by reduced vehicle delivery and a lower average selling price due to different product mix. The sequential increase was mainly attributable to a higher average selling price due to different product mix and increased vehicle delivery. Cost of sales in the second quarter was RMB 22.8 billion down 5.6% year-over-year and up 7.8% quarter-over-quarter. Gross profit in the second quarter was already 2.8 billion, down 53.3% year-over-year, and up 56.9% cultural quarter. Vehicle margin in the second quarter was 9.4% versus 19.4% in the same period last year, and 6.1% in the prior quarter. The year-over-year and sequential changes were mainly due to different product mix. Gross market in the second quarter was 11% versus 20.1% in the same period last year and 7.9% in the prior quarter. Operating expenses in the second quarter was RMB 5.1 billion down 2% year-over-year and up 6.9% quarter-over-quarter. R&D expenses in the second quarter were RMB 2.8 billion, down 1.2% year-over-year and up 2% quarter-over-quarter. SC&A expenses in the second quarter were RMB 2.3 billion, down 16.2% year-over-year, mainly on lower employee compensation and up 11.2% cost over culture mainly on higher marketing and promotion spending. Loss from operations in the second quarter was RMB 2.3 billion versus 827 million income from operations in the same period last year and 3 billion loss from operations in the prior quarter. operating margin in the second quarter was negative 9% versus 2.7% in the same period last year and negative 13% in the prior quarter. Net loss in the second quarter was RMB 1.7 billion versus 1.1 billion net income in the same period last year and 2.3 billion net loss in the prior quarter. Diluted net loss per HWO2 ordinary shareholders was RMB 1.69 in the second quarter, versus diluted net earnings of 1.03 in the same period last year, and diluted net loss of 2.26 in the prior quarter. And now turning to our cash flow and balance sheet. Next cash provided by operating activities in the second quarter was RMB 15 million versus 3 billion used in the same period last year and 6.1 billion used in the prior quarter. Free cash flow was negative RMB 1.3 billion in the second quarter versus negative 3.8 billion in the same period last year and negative 7.4 billion in the prior quarter. Our quarter-end cash position remained robust at RMB 87.5 billion. This solid cash position gave us the flexibility to invest in product and technology innovation while also returning value to our shareholders through share repurchase. To date, we have repurchased a total of 91.7 million Club Day ordinary shares, including 23.7 million ADS for a total consideration of about US dollar 631.5 million. And now for our business outlook. For third quarter of 2026, the company expect to deliver to be between 95,000 and 100,000 vehicles. and costly total revenue between 26.6 billion and 28 billion. This business outlook reflects the company's current and preliminary view on its business situation and market conditions, which is subject to change. That concludes our prepared remarks. I will now turn the call over to the operator to start our Q&A session. Thank you.

Thank you. If you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star 2. If you're on a speakerphone, please pick up the handset to ask your question. For the benefit of all participants on today's call, please limit yourself to two questions, and if you have additional questions, you can re-enter the queue. If you are a Mandarin speaker, please ask your questions in Chinese first. then follow with English translation. Your first question comes from Tim Hesio with Morgan Stanley.

I have two questions. The first question is about L-series. With the model year updates for the LEED-L series now completed, could the management provide an update on its market performance so far since launch? That's my first question.

Thank you.

Hello, Tim. I'm Donghui Ma. Let me answer this question. This year, we have completed the complete L series of products. From L9, L8, to L6, are all integrated into the new generation platform. We are fully equipped with the natural Mahe M100 chip, 5CA genuine core technology, and on the Levis model, we are equipped with the full-featured chassis. We have completed a cover of 200,000 to 500,000 genuine SUVs in a complete price range. From the performance of the commercial delivery, the high-end version is more acceptable to the user. Since the launch of the L9 Lewis version, the order ratio is about 85%. A large number of users are willing to pay the high-end price for the full-line control chassis and these hard-to-reach technical bills. It also boosts our market position in the family SUVs of 400,000 to 500,000. Since the launch of the L8, the Agra version has been the main force of volume. The power supply market price conversion rate is good. As for the new generation, the L6, and many more. In the last generation, we have sold nearly 400,000 units. We have established a good market base. In the new generation of L6, we have supplemented the previous feedback of the users. The battery life is short, the charging speed is slow, and the charging capacity is short. And the zero-gravity seat and 29-inch screen have further improved the experience. After the listing, the order heat is good, looking forward to a stable sales of 10,000 units. This is also the most important basic car type between our 200,000 to 300,000 price range. At the same time, we also see that the exchange period of the exchange period brings a stage bite, such as the exchange period of the exchange period is affected by the loss of old money, the listing of new products, and the influence of policy connections. We will focus on two things. The first one is software portability to continue to improve the value of our products. Our G-Line series of products have a solid hardware base and performance. Later, we will continue to release the ability to control the price through OTA portability, and the related functions such as gradual landing and giant intelligence. The second point is that we will continue to encrypt and cover the self-built 5C supercharging network. By the end of July, the ideal supercharging station has been put into operation and has reached 4,141 stations. The charging station has more than 22,800 roots and has completed 18 national-level high-speed transmission of 9 lines and 9 lines, covering nearly 300 cities nationwide. The self-built 5C network can serve both power storage and new generation 5C steam locomotives. And it has become an important factor in customer purchase. I believe that after L series is completed, it will form a complement with I series of power storage products to support the growth of the overall business. At present, the structure of steam locomotives and power storage orders is close to balance. The follow-up is accompanied by more hair of power storage products.

This year, we have completed the full refresh of the L series from L9, L8, L6 have all transitioned to the latest platform, which includes the Mach M100 chip, 5C range extension, and other core technologies. and on LIVIS models, we also carry our latest fully drive-by-wire chassis. With these, we have completed coverage of the 200,000 to 500,000 RMB range-extended SUV market. Since we started delivery, we have seen a few trends. First of all, our high-end models have exceeded users and our expectations. Since launch, the L9 LIVIS version of the L9 accounts for over 85% of all sales. Many users are willing to pay for this fully drive-by-wire chassis as well as high-end ADAS systems as well as other core technologies. This also solidified our leadership in the RMB 400,000, 500,000 family SUV market. And since the launch of the L8, ultra version has been the key sales driver. and the conversion ratios in our storefronts have been performing very well. Secondly, the new generation L6 has successfully retained the user base from the previous generation with the previous generation laying a very good foundation by delivering almost 400,000 units. And the new generation have addressed key user feedback such as EV range, charging speed, key intelligent platforms and also completed the offering with two zero-gravity seats in the front row and a 29-inch panoramic screen, which also enhanced user experience. So since launch, we have seen very good reception on Alt6, and we're hopeful that there will be a 10,000 units per month demand level steadily going forward. So this is a core pillar for sales in the 200, 200, 300,000 market. In the meantime, we have honestly seen some temporary disruptions caused by the model refresh cycle, including clearing old inventory, ramping up new models, and sales policy transitions have all created short-term operational headwinds. We're currently working very hard to optimize our processes and address these challenges. Going forward, we will focus on two things. The first is to further enhance product value through OTAs. The all-new L series have a very robust and industry-leading hardware as the basis. So MoonFloor will continue to unlock these hardware capabilities and AI features through OTA updates. Secondly, we will continue to build out our 5C supercharger network, increasing both density and coverage as of the end of July we have already 4,141 charging stations in operations and over 22,800 charging stalls. We have now a nine by nine grid covering 18 national level highways and covering more than 300 cities. So our in-house charging network as well as 5C charging capability have become a prerequisite for many of our users in their car purchase decisions. So with the L-series refresh complete, it will now complement our I-series, BEV, to jointly drive overall business growth. Currently, ERAM and BEV each account for half of our total sales, and we expect BEV's share to rise further as we launch more BEV models later this year. Thank you.

Thank you, Guanli Chen. My second question is about MEGA. Today, the company also released a preview video of DreamMega. So, can you please introduce the change direction of DreamMega and the next steps? My second question is about Mega. Following today's release of the preview video for the new Li Mega, could you share the key highlights of this refresh and to your sales expectation? Thank you.

Thank you. I'm Ma Donghui. We have released the pre-release materials for the MEGA update today. This MEGA update is actually based on the feedback of a large number of real users since the MEGA update was launched. It focuses on many key improvements for everyone's core pain points. The focus is mainly on three aspects. The first is the improvement of the chassis and super-heavy experience. For MPV vehicles with large sizes, city head-turning, and not enough flexible user feedback, On the modified Mega, we will equip it with rear-wheel-drive, lane-control, and active-steer-resistance configuration to greatly reduce the turning radius, improve the cornering of the car, and maintain the space and flexible driving control of the car. The second is that the intelligent hardware will be fully upgraded. The fully upgraded frame and sensor hardware will be equipped with our自研M1-100 frame chip, We will continue to improve the positioning of the MEGA family MPV, upgrade the riding experience of the second row and third row seats, and many more. Mega is an MPV with a value of more than 500,000 yuan, and its positioning is very clear. This revision has supplemented the user-centered feedback of the short version, and the product power has also been systematically improved. Regarding the subsequent sales and performance, it is based on the order conversion after the listing, the change in productivity and market demand,

As many of you have noted, we have today officially released the first batch of teaser information on our new generation Mega. This new generation is really based on real user feedback from the previous generation Mega. and to address the important feedback and product forcomings of the previous generation. And they mainly fall into three categories. The first is improvement in chassis and handling experience. Many view MPVs as very large and cumbersome in cities, so the new generation mega wheel will be equipped with rear wheel steering, drive by wire system, as well as active anti-roll bars, which will greatly reduce the turning radius and reduce body roll in cornering and also make the car more flexible and agile in cities. And second is upgrade to the intelligent platform. We improved the entire Platon's driving system with our in-house Mach M100 chips. We've also completed the lateral and rear sensors to improve city and OA and handling complex intersections and auto parking. On the cabin side, we'll also be upgrading to the latest Qualcomm chips to bring better interactive and entertainment experience. And thirdly is improvements in the cabin and details. To further drive the positioning as a family MPV, we've made significant upgrades to the second and third row including the interior atmosphere interactions to better serve the needs of large families. Mega is very clearly positioned as the flagship SUV over 500,000 RMB. So this new generation has really addressed user feedback and have completely remapped the product and improved the product. Obviously the sales performance will depend on many things including sales Our next question comes from Paul Gong with UBS.

Thank you for answering my question. I have two questions. The first question is about the recent increase in raw materials and the impact on the company's profit rate. Can we have a plan on a single-seller level? That is to say, when the second quarter enters the third quarter, there is a directional guide. How can we take measures to deal with the increase in raw materials? Hello, I'm Donghui Ma.

This year, the core raw materials and components on the road have been fluctuating for a period of time. It has brought a lot of cost pressure to the car industry, including us. In terms of the atmosphere, it mainly includes the high-speed development of the AI industry, and then the promotion of the chip and PCB version. The demand for the entire market is high, and the supply is tight, and the price is high. There is also an increase in the price of chips. We rely on the price fluctuation of the pre-purchase quantity and long-term purchase frame agreement to affect the average level of small fish in the industry. In addition, the price of carbonic acid in this year has also shown a relatively obvious periodic fluctuation. Therefore, in order to deal with the periodic cost fluctuation, we have two options. On the one hand, we will continue to advance the detailed operation to achieve the cost reduction. On the other hand, we have to rely on full-time technical resources and independent supply chain systems to build long-term structural cost-effective capabilities. First of all, we will continue to build a high-tech, self-controllable, and self-controllable power supply system, which is a competitive basis for our technology and cost. In the area of power supply, we have implemented power supply, power control, and chip module resources. We will continue to optimize the energy consumption and the technology solutions to ensure the cost-effectiveness of a single car. In addition, in terms of battery systems, we will develop the battery pack and the structure of the whole car step by step. In this way, we can achieve a safe and space-saving battery pack. and many more. Currently, we have constructed the design of the telecom system, the structure design of the TAC, the heat management, the BMS algorithm, and other core self-development capabilities. We will promote the autonomous battery system to be used on more models, and to create a competitive advantage in terms of quality, performance, and cost. In addition, we will create a competitive advantage in terms of core technology and cost through the autonomous chip. We use the new software architecture and software unification design of Microsoft 100 chips to have a significant structural advantage in computing performance and cost control. In short, we will use the long-term amount of clean operation to smooth the control of cost pressure in stages. In the long term, we will rely on the globalization of natural technology

This year, we've seen cyclical fluctuations in upstream raw materials and core components, which has created temporary cost pressures for both the industry and our company, which has then further impacted our gross margin. To look at this in more detail, on the AI side, because of the developments in the AI sector, This has driven demand for chips and PCBs, pushing prices up. On the memory side, memory chip prices have also risen. But with our early volume commitments and long-term procurement agreements, the price impact on us is less than the industry average. And on the battery front, lithium carbonate prices also experienced cyclical fluctuations this year. and to navigate these cyclical cost fluctuations, we're taking a two-pronged approach. On the one hand, we're continuously driving cost reductions through more efficient operations, and on the other hand, we're leveraging our full-stack in-house technology and proprietary supply chain to build long-term structural cost advantages. So specifically, first on the On the electric drive train front, we will continue to be committed to owning and driving the R&D and supply chain of the three key electric systems to solidify our dual modes in technology and cost. On the electric drive side, we have achieved in-house development and manufacturing of motors, controllers, and silicon carbide chip modules which ensures our control over the critical components. By leveraging our integrated architecture, we're continuously optimizing energy consumption and iterating on our technological solutions which has steadily amortized the hardware cost per vehicle. And in terms of battery system, we develop in tandem and deeply integrate our battery packs with the overall vehicle architecture. which allows us to achieve the best possible balance between energy consumption, thermal management, safety, and packaging efficiency, which further delivers an exceptional user experience while maintaining strict cost control. We have established the in-house R&D capabilities in core areas which includes cell pack thermal management and BMS algorithms. We're accelerating the deployment of our proprietary battery systems across a broader range of models, establishing a strong competitive action, quality, performance, and cost. And secondly, is in-house developed chips. We're building a strong competitive advantage across technology and cost again. The proprietary Mach M100 chip is built on an innovative data flow structure with integrated hardware and software customization and delivers a structural advantage in compute performance and also cost. So overall, in the short term, we're trying to smooth out the temporary cost fluctuations and pressures on our business through volume commitments and refined operations. and in the medium to long term, we're relying on scale deployment of our in-house technologies to stabilize the gross margin and support the company's high quality sustainable growth. Thank you.

If we consider the raw material cost as well as the commoditized competition, what would be our latest gross margin target? Thank you. I'm Li Jiang. Because this year's battery, storage components, and core components cost rise, it is a common challenge for the entire industry.

In addition to the registration factor, the ideal car is also in the manufacturing cost of the model and other facilities. This is also carried out according to the strict standards, including the modification of the model, and then the treatment of the matter. As new models are released this year, the hair loss rate is gradually improving, but it must also be due to the impact of the increase in the cost of PCBs and PCBs this year. We will not transfer the cost to the consumer, but will use the design and industrial chain capabilities of YiLiHua, including the advanced resources and storage of batteries, and many more in the 3.0 domain. Through better cost management capabilities, including the efficiency improvement of our entire sales system, cost reduction, and improvement, we have been able to make the whole cost reduction process affordable for users. In the long term, I think the company's healthy net profit rate will be between 15% and 20%. One of the main factors of the difference between the two is

As they can observe, this year we have seen a very big increase in the cost of batteries and memory chips, which is a common challenge for everyone in the industry. And because Li Auto's products are more intelligent, which makes them consume more memory and semiconductors, so we're more impacted. And apart from the impact on Bob, We are also experiencing amortization and depreciation on our tooling and production equipment. We will follow more strict rules as well as the treatment to end-of-production items. As we launch new products this year over time, we already are seeing improvements in gross margin, but we must also face the increase in chip and PCB as well as other semiconductor the cost increase. We must face this as well. We have made a decision not to pass these price increase over to our customers, but instead, we will continue to leverage our integrated design and supply chain, such as deepening our in-house R&D and deployment of our batteries to make our system more self-sufficient. And secondly, we will build better cost control, cost management capabilities and thirdly on the sales front, we have through our sales partner program, we have benefit from lower sales costs, better operational mindset and increase in efficiency. So all of these lower prices and low costs will be transformed to actual benefits that our users can receive. In the long term, my view is that the company and a healthy margin for the company will be somewhere between 15% to 20% gross margin, with the main driver here being the raw material cost. Thank you.

Thank you very much.

Your next question comes from Wenzhou Kuo with SciTechs.

Thank you for accepting my question. I'm Qiao Wenzuo from the center. I have two questions. The first question is about the upcoming i9. What information can you share with us? So my first question is about i9. What information could you please share about the upcoming i9? Hello, I'm Ma Donghui.

Let me answer this question. There are three points to share with you here. The first is about product positioning. i9 is a six-seat SUV built by a multi-member family. It also continues the core product gene of our previous deep-rooted family trip. On the product structure, i9 and Mida will form a precise complement. One is the flagship SUV, the other is the flagship MPV. and many more. After the product officially landed, i6 and i9 will further expand our power storage product line and L series will form a genuine power storage dual power system, improving the product layout of 200,000 to 500,000 high-end driver market. The second is the base of core technology. i9 will also be equipped with 800V 5C high-end platform, will use our new generation of自研 power supply system to rely on the 5C super network built by our country to provide users with an excellent extreme power experience. In terms of intelligence, we will be equipped with自研's Mach 100 chip for high-end chips and subsequent G-SYNC functions to provide sufficient computing power. Supercomputer will also be equipped with our new generation of high-performance supercomputer. to support complex scenarios such as multi-tasking, AI smart interaction, etc. The last is the core value of the user, because Azure focuses on multi-member families. We focus on optimizing the layout of super-large spaces, the comfortable riding experience of all members, and the smart interaction ability of all. Zhili brings a comprehensive experience for each passenger in the car. There are three things about the i9 that I would like to share. First of all, product positioning. i9 is designed for large families as a flagship six-heater SUV, which is

continues our core DNA to build products for large families. In terms of product matrix, I9 will complement Omega, one being a flagship SUV, the other being the flagship MPV. It will both together satisfy the needs of large families who want to buy an electric vehicle. As I9 lands, I9 will also be an important addition to our EV flagship, EV product line, as well as It will also complement the L-Series with our independent range-extended and bad product lines. So these all will complete our coverage of the RMB 200,000 to 500,000 high-end new energy vehicle market. Second thing I'd like to share is the technological foundation. i9 will be equipped with 800-volt 5C high-voltage charging platform. It will be powered by our latest generation In-Health Developed Electric Motors, which also relies on our overall national 5C charging network to provide a very good charging experience for our users. On the intelligence front, i9 will carry the Mach M100 8S chip to power not only a ton of striving, but also embodied AI capabilities going forward. On the cabin front, it will also carry the latest Qualcomm to support multi-task parallel processing as well as AI intelligence agents. And thirdly, in terms of users, I9 will be focusing on large families, on large families traveling together. So our focus will be on the interior experience, comfort for each family member, as well as a spatial interactive experience. in order to provide a flagship level experience for every member of the family. In terms of release timeline, the Li i9 will be launched in mid-September. Unfortunately, due to disclosure regulations, I can't say too much about pricing and specific trim levels. We will be releasing the complete information in the product official launch event. Please stay tuned. Thank you.

My second question is about the autonomous driving. So could you please update us on the progress of the co-optimization between M100 chip and autonomous driving models and what are the key milestones and quantitative metrics for autonomous driving algorithm upgrades in the second half of the year?

This is Yan and let me answer your question. Our in-house smart M100 chip began mass production with the all-new L9 in Q2 and is now deployed across and the all-new L9, L8 and L6. Currently, the chip production capacity is sufficient to meet market demand. Our ADA system, powered by our in-house Mach M100 chip, has been delivered to customers with the all-new LEED L9 since May, leveraging the strong capabilities of Mach platform, we expected to continue making significant improvement to our models. OTA 9.1 began rolling out at the end of July, further reducing end-to-end latency. We also introduced the two new speed preference modes for our Mach VRA model, Efficient and Comfort, improving responsiveness across a broad range of driving scenarios. The upcoming OTA 9.1 will represent a major architectural upgrade. On the model side, we are evolving toward a full 3D vision transformer architecture with three times the parameter count and 4.6 times the compute. This upgrade will deliver systematic improvement across key dimensions of ADAS. including safety, comfort, efficiency, and navigation. In Q4, our goal is to further enhance perception and decision-making capabilities of Mach VRA. Specifically, firstly, longer-range perception. The effective perception range will exceed 250 meters, enabling early speed adjustment and path planning. We expect this to reduce undesirable behaviors such as heartbreaking, hesitation, and unnecessary lane change by more than 30%. Secondly, higher perception accuracy. 3D spatial perception accuracy for key objects will improve to within five centimeters, increasing success rates in challenging scenarios such as narrow road driving, passing through gates, and other tight clearance maneuvers by 50%. Thirdly, a stronger scene understanding. Rather than simply recognizing individual objects, the system will be able to infer intent based on the broader traffic context. In scenarios such as yielding on narrow roads and navigating around the construction zones and making unprotected turns, it will make more decisive yet or proceed decisions reducing unnecessary stand stills and hesitations by more than 20%. Additionally, Mach VLA 2.0 for NVIDIA O-ring and Thor platforms will launch in early September. The share of driving mileage completed with ADAS engaged is a key metric for us at this stage. On the MAC platform, ADAS mileage penetration in urban scenarios has nearly doubled from previous levels. As deliveries of MAC-powered vehicles continue to ramp up, our all-scenarios MPI has increased by 25% in recent months. Thank you.

Your next question comes from Jing Chang with CICC.

Thank you for your question. I have a question. We have limited time. In the second quarter, the company's active cash flow has basically turned positive, but the free cash flow may still be negative. The cash flow is going down a little bit. In the second half of the year, I don't know if the three or four quarters will be able to turn positive for free cash flow. How do we see the trend of cash flow throughout the year? So my only question is about the cash flow. We see the operating cash flow nearly turned positive in the second quarter, but free cash flow remained negative. And also we see some cash position declined. So could you share your outlook on the second half, whether our free cash flow will turn positive and our overview of the cash position?

Thank you, Chang Li. This is Chang Li. I will take this question. From the third quarter with the delivery of our new models, we expected to maintain a stable operating cash flow on a quarterly basis. At present, we have unforecasual hand, which provides strong support for our product innovation technology breakthroughs and global expansion. This year, we remain committed to and many more. We expect our full-year capex to be around RMB 6 billion. For the full year, achieving positive operating cash flow and free cash flow will largely depend on our both-quarter deliveries. Our overall cash flow performance this year will be stronger than last year. Thank you.

Thank you. So my following question is about the intelligent driving. What key contributions do you think It's our self-developed chips and also software and hardware integration can deliver to advancing our intelligent driving capabilities. Thank you.

This is Yan. Let me answer this question. The rapid progress we have made in intelligent driving, both in terms of performance and speed of delivery, is driven by the close integration of our in-house chip and full stack system capabilities. Firstly, we have streamlined our organizational structure so that the chip and model teams can work much more closely together, jointly designing model architectures that can fully leverage the computing capabilities of Mac M100. From the hardware interface perspective, Mac M100 gives Our model algorithm and operating system significant design flexibility, allowing the chip algorithm and the system software to be optimized together for the best overall performance. And secondly, optimization of data and training. With our in-house chip as the foundation, we're able to explore and optimize the training process at much deeper level. In particular, our reinforcement learning approach built around the Ma platform has significantly enhanced the model capabilities within our world model framework. In addition, the data management and shadow data system built on the Ma platform enable the faster model iteration and improvement. Thirdly, system level optimization through our in-house Halo OS Halo OS enables deep integration between app layer applications and the underlying chip, improving both resource utilization and overall system performance. At the system level, this also helps improving engineering quality and accelerates development cycles. Together, the chip model and the OS form a tightly integrated full-stack architecture. creating a complete technology loop for our intelligence driving system. The value of our in-house chip is now extending beyond intelligent driving into embodied intelligence. A vehicle equipped with dual-map M100 chips, we are able to run a fully multi-model foundation model entirely on-device, supporting inputs across Voice, Language, and Video. The model is capable of general-purpose problem understanding, environmental understanding, and task planning. This means the vehicle is no longer limited to executing predefined functions. It can increasingly understand user intentions and the physical world, then plan and execute tasks toward a given object. We believe this will significantly expand The Capability Boundary of the Vehicle as an Embodied Intelligent Agent and represents an important new direction enabled by our integrated hardware software architecture. Thank you.

Your next question comes from Ming Sun Li with B of A. Hello, Ms. Guan.

I have two questions for you. My first question, could you update your overseas markets development strategy? and also the progress. And the second question is to develop your embodied humanoid robot product. Will you continue to invest high R&D amid the current competition background? Thank you.

I am Donghui Ma. I will answer the first question about overseas. Overseas is the company's long-term strategy. The overall progress of the market expansion and product layout is in line with our expectations. As for the regional layout, regarding the Middle East and Central Asia markets, we will focus on the L series of car models as our main product. In July, our new L9 has officially landed in Kazakhstan and Uzbekistan. In September, we plan to hold a new product launch event in Dubai. will continue to open up sales in the Middle East market. At the same time, we have also reached strategic cooperation with the first car group in Kazakhstan to promote localization and localization of assembly cooperation. We are also gradually building, developing, product, production, sales, and service of globalized business capabilities based on existing car types and local assembly projects. In the European market, we will prioritize pure electricity products. Ideal i6 plans to use the Paris exhibition in October to complete the first overseas public image, and plans to open the European market in Q4 this year. For the European market, in addition to the plan to promote MEGA in China, Hong Kong, Singapore, and other European areas within the year, we will also launch the i6 in Europe. and many more. Of course, the expansion of overseas business will also have many objective challenges, including uncertain factors such as the geographical environment, market regulations, and so on. The ideal is to adhere to the positioning of high-end brands overseas. We will combine our own capabilities and the difference in characteristics of various regional markets to control the pace of development. At the same time, we will do a good job of compliance with the products and the construction and brand construction of the after-sales service network. Thank you.

Oversea expansion has been our long-term strategy, and we have made some steady progress in market expansion and product deployment. Overall, the progress has been on track and within our expectations. In terms of regional strategy, for Middle East and Central Asia, we will be focusing on our L-series range-extended models as the key offering. In July, we have launched the all-new Li-L9 in Kazakhstan and Uzbekistan. In September, we're planning to launch in Dubai and to kick off our sales in the Middle Eastern market. In the meantime, we have already formed a strategic partnership with Allure, a leading local car group in Kazakhstan to drive the local assembly of our vehicles. By pushing forward the local adaptation and the local assembly of our current models, we're steadily building out a complete global presence across R&D, products, manufacturing, sales, and service. In Europe, we will be prioritizing bad models. The i6 will be launching at the October Paris Motor Show and officially start selling in the European market in Q4. For right-hand drive markets, in addition to launching Li Mega in Hong Kong SAR and Singapore by the end of this year, we'll also be rolling out the right-hand drive version of the i6 to complete our model lineup in the right-hand drive markets. With all that being said, expanding overseas comes with its own set of challenges, particularly uncertainties around the geopolitical environment and market regulations. We aim to position Li Auto as a premium brand in overseas markets as well, and we will carefully manage our pace, tailoring our approach through our strengths and the unique dynamics of each market, and at the same time, ensure the products are compliant, build after-sales service networks, and continue to build our brand. Thank you.

Hi, I'm Li Xia. I'll answer the question about the research. The first phase of the ideal car is our entrepreneurial phase. The next phase is the phase of continuous research and investment to build our business. We have established a long-term resource strategy for our chip resources. We will continue to invest in and promote our chip resources. The model represents the competitiveness of our company's AI. As for the chip, we think it is a must-have, and the model is the competitiveness. In addition, we will continue to invest in the development of the three chains including the battery. With battery as an example, with battery, with battery as an example, our self-exploitation includes the complete system of telecom, TEC, BMS, and heat-shrink battery, including this system, and then the combination with the vehicle. Through the integrated research and development strategy, as well as the technology and experience accumulated over the past few years for 5C superchargers, we have been able to are very confident in the priority of quality, safety, and life. From this year onwards, the ideal brand of battery will continuously benefit our entire car industry. What I want to emphasize here is that the word itself does not mean that the supplier's products are not good enough. The word itself does not mean that Inverna is still the best battery brand in the world. The word itself does not mean that Ningde is still the best battery brand in the world. Next, I'll answer the question on R&D. If we look at the history of Li Auto, the first 10 years is really our startup phase.

and going forward, the next stage is going to be continued investment in R&D to build our competitive barrier. And among all of this, developing chips in-house is a core strategy, long-term strategy that we have established from a very long time ago. And we will remain committed to keep investing and to improve and iterate on our in-house chips over time. So if we look at chips as a core competitive advantage, AI is going to be, the model is going to be the competitiveness. Other than chips or AI, we have also been investing in the core components of the electric powertrain. Taking batteries as an example, we have in-house developed ourselves, PAC, BMS, and even including thermal management systems, this entire offering, including its pairing and adaptation to our actual vehicle products. With an integrated R&D approach, we have accumulated a ton of experience around 5C charging and technologies, which makes us confident in terms of our in-house batteries' quality, safety, and life expectancy. So starting from the second half this year, we will be rolling out Li Auto-branded batteries across all of our vehicles. And I need to emphasize that by choosing to develop these components in-house doesn't mean that our suppliers' products aren't great. We develop our in-house Mach 100 chips. That doesn't make NVIDIA any less respectable as the best chip company in the world. As we develop our in-house batteries, that doesn't make CATL any less respectable as the best chip company. Battery companies, well, CATL, as well as many other brands, which are all great battery brands. That doesn't make them any less respectable. We believe that in the era of embodied AI, chips and batteries are going to be the most important competitive advantage. And electric powertrain and great products will be the key to our competitiveness, our product competitiveness. So choosing to develop these technologies in-house only shows that we want to be like companies like Apple and Huawei to really hold the key components of our competitiveness in our own hands. Thank you.

As we are reaching the end of our conference call now, I'd like to turn the call back over to the company for closing remarks. Ms. Janet Zhang, please go ahead.

Thank you once again for joining us today. If you have further questions, please feel free to contact the auto investor relations team. This concludes this conference call. You may now disconnect your lines.