Li Auto: Mixed feelings, can new pure electric products support Li Auto again?

Li Auto (LI.O) released its Q3 2024 financial report after the Hong Kong stock market closed and before the U.S. stock market opened on October 31, Beijing time. From the results, Li Auto has moved past the downturn of the pure electric Mega, and the strong sales of the L6 model have positively impacted overall performance this quarter:

1. Automotive gross margin exceeded expectations: The automotive gross margin for Q3 was 20.9%, surpassing market expectations of 20.2% and Li Auto's previous guidance of over 19% for Q3. The key to this outperformance was that the decline in vehicle prices was less than market expectations.

2. The decline in vehicle prices was less than expected, leading to better-than-expected automotive revenue: This quarter, the proportion of the lower-priced L6 continued to rise, and market expectations for vehicle prices had fallen to 266,000 yuan. However, Dolphin Jun speculated that due to breakthroughs in Li Auto's intelligent driving, the selection ratio for the higher-priced Max and Ultra versions increased, offsetting some of the impact of the higher proportion of L6, ultimately driving both automotive revenue and gross margin above expectations.

3. Operating expenses remained restrained, and operating profit was significantly higher than expected: In terms of profit quality, the main difference in operating profit expectations this quarter was that automotive gross margin exceeded expectations by about 600 million yuan, while R&D expenses were 700 million yuan lower than market expectations, resulting in an overall expectation difference of about 1.3 billion yuan. Ultimately, operating profit reached 3.4 billion yuan, significantly exceeding market expectations of 2.2 billion yuan.

4. However, the issue lies in the revenue guidance: With Q3 now behind us, the market is also concerned about Q4 performance expectations in the absence of new products. Q4 sales expectations are mediocre, but the implied revenue per vehicle continues to decline, now dropping to less than 260,000 yuan.

Dolphin Jun's overall view:

Overall, Li Auto's Q3 performance was good, successfully navigating the downturn period of the Mega, driven by strong sales of the L6.

However, the recent stock price has been influenced by: ① The strong sales of the L6 driving delivery volumes to new highs; ② The widening sales gap with Aito, leading the market to believe that competitive pressure from Aito is decreasing, which has continuously boosted the stock price. Currently, the stock price corresponds to a P/S ratio of about 1.5 times for the automotive business in 2024, so the market's expectations for Li Auto's financial report are even higher, requiring not only better-than-expected Q3 results but also important Q4 profit expectations.

However, from the current Q4 expectations, sales forecasts are slightly mediocre during the peak season, but due to the lack of new product stimulation, it is still acceptable. The main issue lies in the declining price expectations, with the implied price expectation for Q4 already dropping to less than 260,000 yuan.

This price expectation implies two aspects of information: ① The proportion of L6 will continue to increase, but the proportion of L6 in Q3 was already close to 50%, so further increases will be limited; ② The possibility of continuing to engage in price wars is rising, and combined with the slightly mediocre sales expectations, it actually reflects that Li Auto is currently under significant order pressure, and market competition may further intensifyThe launch time for Aito M8 has not yet been determined. If it is launched before the end of the year (possibly delivered next year), it will intensify the wait-and-see sentiment, which will also negatively impact the sales and pricing of its direct competitors, Li Auto L7/L8.

As new pure electric models are expected to be launched in the first half of the year, it is anticipated that both the R&D preparations and capital investments in supercharging stations will continue to rise in the fourth quarter, while the selling price of vehicles remains under pressure, which will weaken profitability in the fourth quarter.

Under such valuations and performance expectations under pressure in the fourth quarter, the product rhythm and expectations of new pure electric models to be launched next year become particularly important. Dolphin will focus on the disclosure of Li Auto's performance meeting.

The following is a detailed analysis:

Since Li Auto's sales have already been announced, the most important marginal information is: 1. Gross margin for the third quarter; 2. Performance outlook for the fourth quarter of 2024.

I. Gross margin for vehicle sales is 20.9%, higher than the market expectation of 20.2%

Li Auto previously provided guidance for the gross margin of its automotive business in the third quarter. Due to the increase in delivery volume driven by the L6, the gross margin for the automotive business is also expected to rise to over 19%. The market was more optimistic about the gross margin for the automotive business in the third quarter, reaching 20.2%.

From the actual performance this quarter, the gross margin for Li Auto's automotive business in the third quarter was 20.9%, exceeding market expectations and the guidance previously given by Li Auto. The reason for the better-than-expected performance is mainly due to the vehicle price exceeding market expectations.

(Note: The gross margin data for automotive sales in the third quarter of 2022 excludes the impact of over 800 million in contract losses, and the gross margin data for automotive sales in the fourth quarter of 2023 excludes 400 million in warranty funds.)

Analyzing from the perspective of vehicle economics:

1. The decline in vehicle prices is not as significant as the market expected

The average vehicle price in the third quarter was 270,000 yuan, a decrease of 9,000 yuan compared to the previous quarter, but exceeding the market expectation of 266,000 yuan. The decline in vehicle prices was not as significant as the market expected.

The market expected the decline in vehicle prices due to the model structure, where the proportion of the lower-priced L6 increased by 13 percentage points to 49%, while the proportion of the high-priced, high-margin L9 decreased by 4 percentage points.

However, Dolphin speculates that due to the improvement in Li Auto's intelligent driving capabilities, the selection ratio of the higher-priced Max and Ultra versions is also increasing, which has somewhat offset the adverse impact of the rising proportion of L6, leading to vehicle prices exceeding expectations.

2. Sales rebound and declining battery costs, vehicle costs down by 13,000 yuan

In the third quarter, the cost per vehicle for Li Auto was 214,000 yuan, down 13,000 yuan from the previous quarter, mainly due to:

① The sales volume this quarter rebounded by 41% due to the strong sales of the L6, releasing some scale effects, which led to a decrease in the per-vehicle amortized cost;

② The increase in the proportion of the relatively low-cost L6 this quarter;

② The continued decline in upstream lithium carbonate costs, which drove down battery costs this quarter

3. In the last three quarters, the gross profit per vehicle is 57,000 yuan

From the perspective of vehicle profitability, in the third quarter, Li Auto made a gross profit of 57,000 yuan per vehicle sold, an increase of 4,000 yuan compared to the second quarter. The overall gross margin from vehicle sales rose from 18.7% in the second quarter of this year to 20.9% in the third quarter, an increase of 2.2 percentage points.

II. However, the fourth quarter sales guidance is mediocre, and the revenue expectations imply a continued significant decline in unit price

a) Fourth quarter vehicle sales target: 160,000-170,000, guidance is basically in line with expectations

In the third quarter, driven by the strong sales of the Li Auto L6, the delivery volume reached 153,000 vehicles, a 41% increase quarter-on-quarter.

Li Auto's guidance for fourth quarter deliveries is 160,000-170,000 vehicles, which is basically in line with market expectations (164,000 vehicles). The sales guidance represents an increase of 7,000-17,000 vehicles compared to the actual delivery volume in the third quarter.

From the current weekly sales perspective, October sales are approximately 51,000 vehicles, implying an average monthly sales of 55,000-60,000 vehicles for November/December. Given the boost from the sales peak season, achieving this target is not too difficult. However, compared to the fourth quarter of 2023, where sales increased by 27,000 vehicles quarter-on-quarter due to the sales peak season, this sales guidance is relatively average.

b) However, the implied unit price in the guidance continues to decline quarter-on-quarter, with a significant drop

In addition to the sales guidance, the revenue guidance for this quarter is 43.2 billion to 45.9 billion yuan. Estimating based on other business revenues contributing 1.8 billion yuan in the fourth quarter, the implied unit price for the automotive business is already below 260,000 yuan (259,000 yuan), continuing to decline by about 10,000 yuan compared to this quarter.

This continued decline in unit price implies two aspects of information:

① The proportion of L6 in the third quarter has reached nearly half, and the proportion of L6 in the model structure may continue to increase in the fourth quarter;

② Due to the lack of new models in the fourth quarter, there may be a possibility of continuing to engage in price wars to boost sales.

Dolphin observed that in September, Li Auto had already begun to increase promotional efforts, raising the optional fund for the L6 from 5,000 yuan in August to 8,000 yuan in September, while also providing a subsidy of 5,000 yuan for the L7 and L8, and a subsidy of 7,000 yuan for the L9 and Mega.

In the next two months, in the absence of new models and under the stimulus of increased competition (the launch time for Aito M8 has not yet been determined; if it is launched before the end of the year, it will also negatively impact the sales and pricing discounts of the directly competing L8), Li Auto may continue to engage in price wars.

IV. Under cost reduction and efficiency improvement, operating expenses are relatively restrained

1) R&D expenses: significantly lower than market expectations

This quarter, Li Auto's R&D expenses were 2.59 billion yuan, a decrease of 440 million yuan compared to the previous quarter, significantly lower than the market expectation of 3.29 billion yuanThe reasons for the quarter-on-quarter decline in R&D expenses this quarter may mainly include:

① Li Auto's layoffs in the second quarter reduced the number of R&D personnel, leading to a decrease in personnel compensation: In terms of autonomous driving algorithms, Li Auto is also shifting its focus from rule-based algorithms to the end-to-end large model solutions adopted by Tesla. End-to-end algorithms require fewer personnel compared to rule-based algorithms, so Li Auto's smart driving team has reduced its size from the original 2,000 to less than 1,000.

② There were no new products launched in the third quarter, resulting in a decline in R&D expenses for new products and technology design.

2) Sales and management expenses: Increased SBC expenses slightly exceeded expectations

This quarter, sales and management expenses were 3.36 billion, an increase of 540 million quarter-on-quarter, slightly exceeding the market expectation of 3.03 billion. The reason for the exceeded expectation is that this quarter, approximately 700 million in SBC expenses were recognized due to the potential achievement of performance targets. Excluding SBC expenses, the sales and management expenses for this quarter were 2.63 billion, basically flat compared to the previous quarter.

In terms of channel development, Li Auto has also been very restrained. In the third quarter, Li Auto optimized its channels, reducing the number of stores by 18, focusing on improving single-store sales revenue and after-sales service (this quarter, 15 new after-sales service centers were added).

V. Both revenue and gross margin exceeded market expectations

With sales already announced, Li Auto's total revenue for the third quarter was 42.9 billion, a quarter-on-quarter increase of 35%, slightly higher than the market expectation of 41.1 billion.

The revenue exceeded market expectations mainly due to the slightly higher unit price in the automotive business compared to market expectations. In other businesses (insurance, used cars, etc.), the increase in cumulative vehicle sales this quarter also led to an increase in sales of services and parts, rising by 19,000 quarter-on-quarter, slightly above the market expectation of 153,000.

The overall gross margin for this quarter also exceeded market expectations, mainly driven by the automotive business's gross margin exceeding expectations. However, the gross margin for other businesses this quarter was 36.9%, lower than the market expectation of 42%.

It basically met expectations; although the automotive business's gross margin slightly exceeded expectations, the gross margin for other businesses declined by 6.7% quarter-on-quarter to 36.3%, lower than the market expectation of 44.9%. Finally, the gross margin for the third quarter was 19.5%, basically in line with the market expectation of 19.6%.

VI. Recovery of gross margin and restrained investment in three expenses led to a significant quarter-on-quarter increase in operating profitIn the third quarter, Li Auto saw a significant increase in operating profit, which is considered to have substantial value. The operating profit for this quarter reached 3.43 billion, a sequential increase of approximately 3 billion, far exceeding market expectations of 2.19 billion. The operating profit margin also improved from 1.5% in the previous quarter to 8% this quarter.

The core reason for the better-than-expected results was mainly due to the sequential recovery of the gross margin in the automotive business, as well as a relatively restrained investment in the three expenses, especially in research and development. Additionally, the release of operating leverage contributed to the operating profit exceeding market expectations.

VII. Significant Sequential Growth in Operating Cash Flow

This quarter, operating cash flow was 11 billion, a sequential recovery of approximately 11.5 billion compared to -400 million in the previous quarter, resulting in an increase in Li Auto's cash on hand. By the end of the third quarter, cash and cash equivalents reached 106.5 billion, an increase of 9.2 billion sequentially.

The reasons for the sequential increase include the rise in net profit (with a sequential increase of 2.4 billion in Non-GAAP net profit after adding back SBC adjustments) and the increased cash flow utilization from upstream due to higher sales (an increase of 5.2 billion sequentially).

In terms of capital expenditure, this quarter's capital expenditure was 1.97 billion, an increase of 550 million compared to the previous quarter. Since there were basically no new stores opened this quarter, the expenditure was mainly used for the construction of supercharging piles. The number of supercharging stations increased by 280 to reach 894, steadily progressing but still below the initial plan of 2,000 stations for the year. Currently, the number of supercharging stations is still lower than that of pure electric peers. With new pure electric products set to launch in the first half of next year, the fourth quarter may enter a preparation period for the pure electric strategy, potentially increasing capital investment in supercharging piles.

For historical articles by Dolphin Jun, please refer to:

August 28, 2024 Financial Report Review: "After being 'rubbed on the ground' by Huawei, can Li Auto still have good days?"2024-08-29 Conference Call Summary: "Expected third-quarter automotive gross margin to rebound to over 19%"

2024-05-20 Financial Report Commentary: "Li Auto: Profit Flash Crash! The Moment to Test Faith Has Arrived"

2024-05-20 Conference Call Summary: "Delay in the release of pure electric SUV to the first half of next year (Li Auto 1Q24 Conference Call Summary)"

2024-03-04 Li Auto Launch Event: "Li Auto Launch Event: Slight Improvement in Product Strength, Firmly Not Reducing Prices, Pure Electric Small Trial"

2024-02-26 Financial Report Commentary: "Li Auto: Not Being a 'Big Mouth', Just a Hardworking Warrior"

2024-02-27 Conference Call Summary: "No plans to launch models below 200,000 in the next 5 years"

November 9, 2023 Financial Report Review: "New Forces vs. Old Guns, Can Li Auto Compete with Huawei?"

November 9, 2023 Conference Call Summary: "Taking Intelligent Driving as the Core Goal (Li Auto 3Q23 Conference Call Summary)"

August 8, 2023 Financial Report Review: "Peeling Back the Layers on Li Auto: Is the 'Explosion' Really So 'Ideal'?"

August 8, 2023 Conference Call Summary: "Li Auto Summary: Capacity Bottleneck in Components, Gross Margin Guidance Maintained at 20%+"

May 10, 2023 Financial Report Review: "Li Auto: Ready to Fight, New Force Leader Has It Under Control"

May 10, 2023 Conference Call Summary: "Li Auto Summary: Market Share First, Gross Margin Target of 20% Unchanged"

February 27, 2023 Financial Report Review: "Is Li Auto Fierce as a Tiger? Competition Steady as a Dog"

February 27, 2023 Conference Call Summary: "Li Auto: 'Achieve 20% Market Share in the 300,000-500,000 Luxury SUV Market in 2023'"

December 9, 2022 Financial Report Review “Li Auto's Profit Crash? Not Fatal, but Quite Awkward”

December 9, 2022 Conference Call Minutes “In 2023, 'Hundred Billion' Li Auto, a Pure Electric Vehicle”

August 16, 2022 Financial Report Review “Li Auto Throws Thunder, L9 Can't Support 'Collapsed Ideal'”

August 16, 2022 Conference Call Minutes “Li ONE Was 'Eaten' by L9, L8 Will Launch Early and Sell Early (Meeting Minutes)”

June 22, 2022 Product Release Highlights “L9, Li Auto's New 'Ideal'”

May 10, 2022 Meeting Minutes “Li Auto: Three New Products Will Be Launched in 2023, Welcoming a Major Product Cycle Year”

May 10, 2022 Financial Report Review “Li Auto's Ideal, Is Everything Dependent on the Second Half of the Year?”

February 26, 2022 Meeting Minutes “Completing the 0-1 Validation Period, See How Li Auto Achieves 1-10 Growth (Meeting Minutes)”

February 25, 2022 Earnings Presentation Live “Li Auto (LI.US) Q3 2021 Earnings Conference Call”

February 25, 2022 Financial Report Review “Stretching 'Cash' Capability, Li Xiang's Ideal Becomes Reality”

November 30, 2021 Meeting Minutes “With Xiaomi Launching Pure Electric Models One After Another, How Does Li Auto Compete? (Meeting Minutes)”

On November 29, 2021, performance briefing live stream: Li Auto (LI.US) Q3 2021 Earnings Conference Call

On November 29, 2021, financial report commentary: In terms of profitability, XPeng and Nio are not as good as it; is Li Auto a speculator or a long-termist?

On August 31, 2021, meeting minutes: Li Auto: Surpassing Nio and XPeng in Q3, aiming for 150,000 units next year (Meeting Minutes)

On August 30, 2021, performance briefing live stream: Li Auto (LI.US) Q3 2021 Earnings Conference Call

On August 30, 2021, financial report commentary: Li Auto: Steady performance, strong momentum?

On June 30, 2021, comparison study of the "three fools" - Part 2: New car-making forces (Part 2): Doubling in fifty days, can the three fools continue to run wildly?

On June 23, 2021, comparison study of the "three fools" - Part 1: New car-making forces (Part 1): Choosing the right people, doing the right things, reviewing the people and events of the new forces

On June 9, 2021, comparison study of the "three fools" - Part 1: New car-making forces (Part 1): Choosing the right people, doing the right things, reviewing the people and events of the new forces

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