Li Auto’s Q3 earnings report beat market expectations, with impressive revenue and gross margin results. However, its Q4 revenue guidance fell short, causing the stock to drop 6% pre-market.
I had predicted that Q3 performance would exceed expectations, given sales data that outpaced analysts’ estimates. Revenue followed suit, driven by strong sales, with the only uncertainty being gross margin. With analyst expectations for margin set low, Li Auto’s actual Q3 gross margin came in higher, limiting its impact on the stock price. The real focus is now on Q4 guidance.
Li Auto projects Q4 revenue at RMB 432-459 billion, a year-on-year growth of 3.5%-10%, below the expected RMB 360 billion. It forecasts sales between 160,000-170,000 units, with a midpoint estimate of 165,000, higher than the expected 163,700 units. However, increased sales of lower-priced models led to a drop in revenue per vehicle, causing minimal incremental revenue. Even at the high end of guidance, growth is just 10%, lacking appeal for an EV company. This slower growth may prompt stricter valuation standards.
Currently, Li Auto’s price-to-sales ratio stands at 1.5x. In comparison, traditional automaker Toyota, with 10% growth, has a 0.8x ratio, while BYD, a faster-growing EV leader, has a 1.2x ratio. Overall, this Q3 report offers limited upside for Li Auto's stock.
Detailed Analysis:
Revenue: Q3 revenue reached RMB 429 billion, up 23.6% year-on-year, beating the forecasted RMB 413 billion. The increase mainly resulted from higher sales, totaling 152,800 units, up 45.4% from the prior year and exceeding expectations of 149,100 units. However, the increased share of low-priced L6 models reduced revenue per vehicle to RMB 270,000, a 15.6% decline, leading revenue growth to lag behind sales growth.
Gross Margin: Q3 gross margin was 21.5%, far above the forecasted 20.07%. This improvement stemmed from lower battery costs and scale efficiencies. Net margin also rose, supported by a reduction in R&D expenses, which were RMB 2.6 billion, down 8.2% year-on-year. The automotive gross margin was 20.9%, exceeding the expected 20.2%, and operating margin hit a record 8%.
While Q4 guidance fell short, Li Auto still ranks highly in profitability and cash flow among EV startups. By Q3, cash holdings were RMB 106.5 billion, with free cash flow at RMB 9.1 billion. This financial strength, avoiding frequent equity financing, preserves shareholder equity and supports future competition.
Outlook: Li Auto’s growth potential largely depends on the launch of new models, making upcoming releases crucial to its future expansion.
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