Barely Benefited from AI Story with Fierce Competition of Hybrid Cars, How can Li support "Li"?

$Li Auto(LI.US) Li Auto (LI.O) released its Q4 2024 financial report after the Hong Kong stock market closed and before the US stock market opened on March 14, Beijing time. From the results, the performance in Q4 and the expectations for Q1 2025 are not good:

1. Automotive gross margin is below market expectations and continues to decline month-on-month: In the key automotive gross margin indicator for each quarter, Li Auto missed market expectations this time, with a gross margin of only 19.7% for its automotive business this quarter, a decline of 1.2 percentage points from the previous quarter. Last quarter, Li Auto had guided for over 20%, so the market consensus was still at 20.6%, with major institutions even expecting it to reach 21.3%.

2. The core reason for the lower-than-expected automotive gross margin this quarter lies in the per-vehicle cost: While the selling price of vehicles exceeded market expectations this quarter, the per-vehicle cost actually showed an upward trend month-on-month. Dolphin Research believes this may be mainly due to: ① Li Auto recognized a loss on purchase commitments, which Dolphin Research estimates was due to overestimating the delivery volume in Q4, but the specific amount has not been disclosed in the financial report; ② Q4 sales only increased by about 6,000 vehicles month-on-month, lower than Li Auto's guidance, and the scale effect was basically not released this quarter; ③ Suppliers' annual reductions did not meet expectations;

3. The sales guidance for Q1 2025 is acceptable, but the implied vehicle price in the revenue guidance has significantly declined again, below market expectations:

The sales guidance for Q1 2025 is 88,000 to 93,000 vehicles, implying March sales of 32,000 to 37,000 vehicles, an increase of 5,500 to 10,500 vehicles from February, mainly due to the month-on-month increase brought by price reductions in March, but the overall guidance is still acceptable, and the price cuts have indeed shown results.

However, in the implied unit price guidance in the revenue guidance, the unit price for the automotive business in Q1 is only 247,000 yuan, continuing to decline by 22,000 yuan from this quarter, which is lower than market and Dolphin Research's expectations, with significant risks for further declines in automotive gross margin in Q1.

4. Although the three expenses are restrained, the actual restraint quality is not high: In terms of R&D expenses, although it is 400 million lower than market expectations, this is mainly due to reduced employee compensation from staff cuts and no new products launched in Q4, as well as the pure electric vehicle launch being pushed to the second half of the year. Dolphin Research expects R&D expenses to shift to 1H25.

As for selling and administrative expenses, the month-on-month decline is mainly due to the recognition of excessive SBC expenses in Q3, and after removing the SBC impact, selling and administrative expenses actually increased by 240 million month-on-month, mainly due to increased marketing activities, but this did not lead to a significant increase in sales.

5. Adjusted operating profit declined month-on-month, and adjusted net profit basically met major institutions' expectations due to interest income contributions, but the quality is also not high:

In terms of operating profit, which carries significant weight, Li Auto's Q4 saw a month-on-month increase of 200 million, but after removing the SBC impact, due to the decline in gross margin, although R&D expenses decreased, the adjusted operating profit declined by 200 million this quarterIn terms of adjusted net profit, the 4.04 billion this quarter is basically in line with major banks' expectations, but it is mainly driven by a significant interest income contribution of 400 million, indicating that the quality of the results is not high.

Dolphin Research's Overall View:

Overall, Li Auto's performance in the fourth quarter and expectations for the first quarter of 2025 are not good. Although there are not many cash incentives in the fourth quarter, which have almost no impact on the average price of cars, Li Auto is actually increasing its marketing activities. However, despite being in the traditional peak season, the sales performance in the fourth quarter remains mediocre, falling short of guidance and market expectations. This reflects to some extent that the competitiveness of Li Auto's L series extended-range products is gradually being undermined, with the market share of Li Auto's extended-range vehicles declining by 2.1% quarter-on-quarter (Note: Li Auto's extended-range market share is calculated as Li Auto's extended-range sales divided by the total industry plug-in hybrid sales).

Although there are no new car deliveries in the first quarter, which requires passive price reductions to boost sales, the impact on the average car price is still higher than Dolphin Research's expectations, with a quarter-on-quarter decline of 22,000 yuan. However, Li Auto's gross margin guidance for the first quarter is 19%.

Therefore, with poor performance in Q4 2024 and relatively weak expectations for the first quarter, if Li Auto does not provide an unexpected sales and gross margin guidance, even though Li Auto's valuation is still not high compared to other leading new forces (such as XPeng/Xiaomi Auto), the stock price still has significant room for short-term decline.

Looking at 2025 overall:

In terms of sales targets: Some major banks currently expect Li Auto to achieve 700,000 units in 2025, but the actual market expectations are already quite pessimistic, ranging between 550,000 and 650,000 units. This implicitly suggests that there is basically no incremental growth for extended-range models (only about 4 months more deliveries of the L6 compared to 2024), with sales of extended-range models expected to be between 500,000 and 580,000 units in 2025.

For pure electric vehicle sales, the reasons include: ① Delay in the launch of pure electric models + ② Previous failures before Mega + ③ Most importantly, it is currently very difficult for high-end pure electric vehicles to achieve explosive sales (the reasons can refer to Dolphin Research's in-depth coverage of Nio previously). The competition in the 200,000 to 300,000 yuan pure electric vehicle segment is very fierce, and market expectations for Li Auto's pure electric vehicle sales are not high, basically between 50,000 and 70,000 units. Therefore, it can be seen that Li Auto's basic market still relies on extended-range models, so the extent of upgrades to Li Auto's extended-range models this year is considered a key factor by Dolphin Research.

However, from the current market information, the upgrades to Li Auto's extended-range models are still mainly focused on hardware in intelligent driving, with other configurations basically remaining consistent with the 2024 models, and the upgrade intensity seems limited. Especially in the fourth quarter of 2024, it has indeed been observed that the competitiveness of Li Auto's L series extended-range vehicles is being undermined, and with more competing products targeting Li Auto's L series expected to be launched in 2025 (currently the Zhijie R7 extended-range version, the Aito new model M8 set to launch in April 2025, targeting Li Auto's L7 and L8, as well as XPeng's extended-range model based on the G9 platform to be released in the second half of the year), Dolphin Research remains quite concerned about whether Li Auto's basic market is stable

② As for the expected gross margin of the automotive sector, the market currently anticipates a gross margin of over 20% for Li Auto's business. However, the expected gross margin for pure electric models (the volume-selling pure electric model i6 is expected to be priced at 200,000-250,000 yuan) is likely to be relatively low. Additionally, if the range-extended models do not undergo significant changes, the resulting sales increase may fall short of expectations, necessitating price reductions. Therefore, the gross margin of the automotive business may face certain risks.

Although Li Auto's positioning in smart driving and AI narratives remains in the first tier, its valuation is lower compared to XPeng and Xiaomi Auto (even under the current optimistic market expectation of 650,000-700,000 units, Li Auto's current valuation corresponds to a 2025 automotive business P/S ratio of only 1.2-1.3 times, while XPeng and Xiaomi are around 2 times/2.5 times). However, if the fundamentals of the automotive sector are not stable, it will be difficult for the market to factor in the valuation of AI into Li Auto's expectations.

The following is a detailed analysis:

Since Li Auto's sales have already been announced, the most important marginal information lies in: 1. Gross margin in Q4; 2. Performance outlook for Q1 2025.

1. Vehicle sales gross margin at 19.7%, below market expectation of 20.6%

From the actual performance of Q4 2024, it is evident that Li Auto missed market expectations for the crucial automotive gross margin, with this quarter's automotive business gross margin at only 19.7%, a decline of 1.2 percentage points quarter-on-quarter, while the market consensus expectation was still at 20.6%, with major institutions even expecting it to reach 21.3%.

However, considering that the actual automotive business gross margin in Q3 2024 included a rebate from CATL, the actual automotive business gross margin for Q3 was 19.5%. Although there was no one-time factor of battery rebates confirmed in Q4, Li Auto did guide for a gross margin of over 20% for Q4 during the Q3 earnings call, primarily contributed by annual reductions from suppliers and economies of scale.

From the actual performance in Q4, it is clear that when the economies of scale have not been realized (Q4 delivery volume was below Li Auto's guidance for Q3), ① the annual reductions from suppliers did not meet expectations; ② Li Auto recognized a loss on purchase commitments, likely due to overestimating Q4 delivery volumes, although the specific amount has not yet been disclosed in the financial report.

(Note: The Q4 2022 automotive sales gross margin data is adjusted for the impact of over 800 million yuan in contract losses, while the Q4 2023 data is adjusted for 400 million yuan in warranty deposits.)

Analyzing from the perspective of per vehicle economics, the reason for the gross margin falling short of expectations mainly lies in the per vehicle cost not meeting market expectations, and even showing an increase compared to the previous quarter despite little change in model structure. The reasons are as follows:

1. The average vehicle price decreased by 2,000 yuan quarter-on-quarter, with a minor decline that exceeded market expectations.In the fourth quarter, the average price per vehicle was 269,000 yuan, a decrease of nearly 2,000 yuan compared to the previous quarter, but exceeding market expectations of 267,000 yuan, indicating that the decline in vehicle prices was not as significant as anticipated.

From the perspective of vehicle model structure, there was little change in the model structure this quarter, with the increased proportion of Mega and L8 slightly offsetting the impact of the decline in the proportion of L9.

In terms of promotional activities, the promotional efforts in the fourth quarter were not substantial, with the basic L series primarily focused on financial interest subsidies, and actual cash discounts being minimal (October: 1.99% loan rate, November: 2.2% loan rate + 2,000 yuan purchase subsidy for L7/8/9/Mega, December: 0.99% loan rate). Although this may drag down the average selling price, the impact on the selling price of vehicles was not significant, resulting in the final selling price slightly exceeding market expectations.

2. The cost per vehicle increased by 2,000 yuan compared to the previous quarter, exceeding market expectations by 4,000 yuan, mainly due to losses from purchase commitments and suppliers' annual reductions not meeting expectations.

In the fourth quarter, the cost per vehicle for Li Auto was 216,000 yuan, an increase of 2,000 yuan compared to the previous quarter. However, in the third quarter, there was a rebate from battery manufacturers, making the actual cost per vehicle approximately 218,000 yuan. Nevertheless, the performance of the cost per vehicle in the fourth quarter still fell short of market expectations, mainly due to:

Li Auto recognized a loss from purchase commitments, which Dolphin Research estimates was due to overestimating the delivery volume in the fourth quarter, but the specific amount has not yet been disclosed in the financial report.

Fourth-quarter sales only increased by about 6,000 vehicles compared to the previous quarter, which was below Li Auto's guidance, and the scale effect was not realized in this quarter.

Suppliers' annual reductions did not meet expectations.

3. Finally, the gross profit per vehicle in the fourth quarter was 53,000 yuan, lower than market expectations.

In terms of profitability per vehicle, Li Auto made a gross profit of 53,000 yuan per vehicle sold in the fourth quarter, lower than the market expectation of 55,000 yuan. The overall gross margin from vehicle sales decreased from 20.9% in the third quarter of this year to 19.7% in the fourth quarter, a decline of 1.3 percentage points.

II. The sales guidance for the first quarter of 2025 is acceptable, but the guidance for vehicle prices shows a significant decline!

a) First-quarter sales guidance: 88,000-93,000, slightly higher than Dolphin Research's expectations.

For the first quarter of 2025, Li Auto's sales guidance is 88,000-93,000 vehicles. Since sales for January and February have already been announced (January sales: 30,000 vehicles, February sales: 26,000 vehicles), this implies March sales of 32,000-37,000 vehicles, an increase of 5,500-10,500 vehicles compared to February. This guidance is acceptable.

Currently, Li Auto's latest weekly sales are 7,300 vehicles (from March 3 to March 9), indicating that the average weekly sales need to reach around 7,600-9,200 vehicles over the next three weeks. Given that there have already been price reductions for older models at the beginning of March, and with no new vehicles in March, Dolphin Research expects that achieving the lower limit of the guidance will not be too difficult, but it is still necessary to observe weekly sales to assess the impact of price reductions (whether the upper limit of the guidance can be achieved)

b) However, the implied unit price in the guidance continues to decline month-on-month, down by 22,000 yuan!

In addition to the sales guidance, the revenue guidance for this quarter is 23.4 billion to 24.7 billion. Estimating based on the contribution of other business revenues of 1.66 billion in the first quarter of 2025, the implied unit price for the automotive business is only 247,000 yuan, continuing to decline by 22,000 yuan compared to this quarter.

From the information currently available from Dolphin Research:

① The sales structure in January and February is actually slightly improving, with the proportion of high-priced models L9+Mega reaching 16.2%, an increase of 1.5 percentage points compared to the fourth quarter of 2024, while the proportion of low-priced models L6+L7 is declining (down about 1.7 percentage points compared to 2024Q4);

② In March, Li Auto began offering cash discounts, providing cash discounts of 10,000/12,000/12,000/16,000/8,000 yuan for L6/L7/L8/L9/Mega respectively, but this discount only started in March;

Therefore, the decline in the implied unit price is expected to exceed Dolphin Research's expectations. It may imply that ① the proportion of L6 will increase in March; ② there may be more discount.

From the perspective of gross margin expectations, with such a severe decline in unit price expectations, the market will be very concerned about Li Auto's gross margin expectations for Q1 2025. The latest market expectation for automotive gross margin before the financial report is still 20.1%, while Li Auto's guidance for automotive business gross margin in the first quarter is 19%, which is below market expectations.

Four, under cost reduction and efficiency improvement, operating expenses are relatively restrained

1) R&D expenses: Employee compensation decreases and no new cars launched in the fourth quarter, R&D expenses are below market expectations

Li Auto's R&D expenses for this quarter are 2.41 billion, down 180 million from the previous quarter, which is below the market expectation of 2.8 billion.

The reasons for the quarter-on-quarter decline in R&D expenses may mainly include:

① Decrease in employee compensation, as Li Auto began to cut R&D personnel in the second quarter, while focusing more on basic infrastructure (computing power) after shifting to end-to-end, requiring fewer personnel compared to rule-driven algorithms, and the number of the intelligent driving team is also decreasing.

② There were no new products launched in the fourth quarter, leading to a decline in R&D expenses for new products and technology design. The upgraded range-extended model was only released in the second quarter of this year, and pure electric models began to be released in the third quarter, with R&D expenses expected to shift to the first half of 2025.

2) Sales and management expenses: Increased marketing activities lead to sales and management expenses exceeding market expectationsIn this quarter, sales and management expenses were 3.08 billion, a decrease of 280 million compared to the previous quarter. However, due to a large reward for the CEO related to sales target unlocks in the third quarter (where rewards are unlocked for every 500,000 cumulative sales milestone), the SBC expenses included in the third quarter's sales and management expenses amounted to 730 million, while only 200 million was recognized in the fourth quarter. Therefore, the adjusted sales and management expenses still increased by 240 million compared to the previous quarter, exceeding market expectations of 2.83 billion, mainly due to increased marketing activities.

In fact, even though there were not many price reductions in the fourth quarter, marketing activities increased instead, resulting in sales still falling short of expectations, with only a 6,000-unit increase compared to the previous quarter. This reflects that the core competitiveness of the Li Auto series is gradually being undermined.

In terms of channel development, Li Auto continued to expand its channels in the fourth quarter, with the number of stores and service centers continuing to accelerate. However, the coverage of cities seems to be insufficiently rapid (only 4 new cities were covered in the fourth quarter), and the lower pricing of the L6 model may lead to a higher proportion of core users in second- and third-tier cities.

5. Both revenue and gross margin exceeded market expectations

With sales already announced, Li Auto's total revenue in the fourth quarter was 44.3 billion, an increase of 3.3% compared to the previous quarter, which is basically in line with market expectations but lower than some major banks' expectations of 44 billion.

As mentioned by Dolphin Research regarding the automotive business, in terms of service business, this quarter was slightly below the market expectation of 1.8 billion, while the service business gross margin this quarter was 35.5%, lower than the market expectation of 40.5%.

Since other businesses (insurance, used cars, parts sales services) are basically directly related to Li Auto's cumulative sales, this quarter only increased by 80 million compared to the previous quarter (which increased by 190 million compared to the previous quarter). Dolphin Research estimates that this may be related to certain discounts in the insurance business and increased giveaways in parts sales.

6. Adjusted operating profit declined quarter-on-quarter, and Non-GAAP net profit basically met major banks' expectations due to interest income contribution

In the fourth quarter, Li Auto's operating profit, which carries significant weight, increased by 200 million compared to the previous quarter. However, after removing the SBC impact, due to a decline in gross margin, although R&D expenses decreased, the adjusted operating profit declined by 200 million this quarter.

In terms of adjusted net profit, this quarter's 4.04 billion basically met major banks' expectations, but it was mainly driven by a significant contribution of 400 million in interest income (compared to 20 million in the previous quarter), indicating that the quality of meeting expectations is not high

7. Decline in Free Cash Flow

This quarter, operating cash flow was 8.68 billion, a decrease of 2.3 billion compared to the previous quarter's 11 billion, mainly due to an increase in payments related to inventory purchases.

The free cash flow for this quarter was 6.05 billion, a decrease of 3 billion compared to the previous quarter, primarily due to increased capital expenditures (up 650 million quarter-on-quarter).

The increase in capital expenditures was partly due to new store investments (23 new stores added this quarter) and partly due to the accelerated construction of Li Auto's supercharging stations, in preparation for the launch of pure electric models (in the fourth quarter, Li Auto added 833 supercharging stations, nearly the sum of the past 8 months).

Li Auto plans to expand its supercharging stations to 2,500 (15,000 charging piles) by July 2025 and reach 4,000 by the end of 2025 to support the sales of pure electric models. It is expected that capital expenditures will continue to increase during the preparation period for pure electric vehicles.

For historical articles by Dolphin Research, please refer to:

August 28, 2024, financial report commentary "Pressed down by Huawei, can Li Auto still have good days?"

August 29, 2024, conference call minutes "Expected automotive gross margin to rebound to over 19% in Q4"

May 20, 2024, financial report commentary "Li Auto: Profit Flash Crash! The moment to test faith has arrived"Minutes of the conference call on May 20, 2024: Postponing the release of pure electric SUVs to the first half of next year (Li Auto 1Q24 conference call minutes)

Li Auto press conference on March 4, 2024: Li Auto Press Conference: Slightly Improving Product Strength, Firmly Not Reducing Prices, Pure Electric Small Trial

Financial report commentary on February 26, 2024: Li Auto: Not a "Big Mouth", Just a Hardworking Player

Minutes of the conference call on February 27, 2024: No models below 200,000 will be launched in the next 5 years

Financial report commentary on November 9, 2023: Newcomers vs. Veterans, Can Li Auto Compete with Huawei?

Minutes of the conference call on November 9, 2023: Making Intelligent Driving the Core Goal (Li Auto 3Q23 conference call minutes)August 8, 2023 Financial Report Review: "Peeling Back the Layers to See Li Auto: Is It Really That 'Ideal' Behind the 'Explosion'?"

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

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

May 10, 2023 Conference Call Minutes: "Li Auto Minutes: 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 Minutes: "Li Auto: 'In 2023, Capture 20% Share of the 300,000-500,000 Luxury SUV Market'"

December 9, 2022 Financial Report Review: "Li Auto's Profitability Flash Crash? Not Fatal, but Quite 'Awkward'"

December 9, 2022 Conference Call Minutes: "2023, 'Trillion' Li Auto, A Pure Electric Vehicle'"August 16, 2022 Financial Report Review “Li Auto Throws Thunder, L9 Can't Support the 'Collapsed Ideal'”

August 16, 2022 Conference Call Minutes “Li Auto ONE Was 'Eaten' by L9, L8 Will Be Released Early (Minutes)”

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

May 10, 2022 Conference 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, All Hopes Rest on the Second Half?”

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

February 25, 2022 Earnings Presentation Live “Li Auto (LI.US) Q4 2021 Earnings Conference Call”

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

November 30, 2021 Conference Minutes “How Does Li Auto Compete with Xiaomi's Newly Released Electric Vehicle? (Minutes)”

November 29, 2021 Earnings Presentation Live “Li Auto (LI.US) Q4 2021 Earnings Conference Call”

November 29, 2021 Financial Report Review “In Terms of Profitability, XPeng and Nio Are Not as Good as It, Is Li Auto Speculative or Long-term Oriented?”On August 31, 2021, the meeting minutes "Li Auto: Surpassing Nio and XPeng in the Fourth Quarter, Aiming for 150,000 Units Next Year (Meeting Minutes)"

On August 30, 2021, the performance briefing live stream "Li Auto (LI.US) 2021 Fourth Quarter Earnings Conference Call"

On August 30, 2021, the financial report commentary "Li Auto: Steady Performance, Strong Momentum?"

On June 30, 2021, the comparison study of the "Three Stupidities" - Part Two "New Forces in Car Manufacturing (Part Two): Doubling in Fifty Days, Can the Three Stupidities Continue to Run Wild"

On June 23, 2021, the comparison study of the "Three Stupidities" - Part One "New Forces in Car Manufacturing (Part One): Market Enthusiasm Diminishes, What Do the Three Stupidities Rely on to Solidify Their Position?"

On June 9, 2021, the comparison study of the "Three Stupidities" - Part One "New Forces in Car Manufacturing (Part One): Investing in the Right People, Doing the Right Things, Analyzing the People and Events of the New Forces"

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