To The Moon

$Li Auto(LI)$ $LI AUTO-W(02015)$ released its first-quarter earnings report yesterday, and the stock price plummeted nearly 20%! It was such a shocking scene.

Last September, I pointed out that the success factor of Li Auto, $NIO Inc.(NIO)$ $NIO Inc.(NIO.SI)$ $NIO-SW(09866)$ and $XPeng Inc.(XPEV)$ $XPENG-W(09868)$ relied on being early birds, but ultimately, they fell victim to intensifying competition. And now, Li Auto was following in the footsteps of XPENG and NIO. Who's next? Maybe $Seres Group Co.,Ltd.(601127)$ !

Let's talk about Li Auto's first-quarter report. It's quite a mess.

Revenue and Profits

Revenue was RMB25.6 billion, up 36.4% year-on-year. Okay, growth is still there, but profits? Oh, my!

Gross margin was 20.6%, slightly higher than 20.4% in the same period last year. But the vehicle manufacturing margin was 19.3%, down from 19.8%. That's because of price cuts and promotions.

Despite the lousy gross margin, Li Auto still made a profit of RMB590 million in the first quarter. It's a drop of 36.8% year-on-year, but it's still a profit! Better than XPeng and NIO who are losing money while trying to gain popularity.

However, looking at the operating margin, it was negative 2.28% in the first quarter:

Therefore, Li Auto's core business is actually losing money again. The net profit is positive thanks to non-core profits like interest and investment income, which totaled RMB1.07 billion in the quarter, much higher than RMB420 million last year.

Expense

In terms of expense ratio, Sales and Administrative expenses were RMB2.98 billion, up 81% year-on-year, accounting for 11.6% of total revenue, much higher than 8.8% in the same period last year. R&D expenses were RMB3 billion, up 64.6%, accounting for 11.9% of revenue, also higher than 9.9% last year.

All these expenses are related to Li Auto's two new models: the MEGA MPV and the L6 SUV. Both didn't sell well, especially the MEGA. All that money spent is gone with the wind, making it a negative asset.

Look at the numbers: gross margin is 20.6%, but total expenses are 23.5%. How can they possibly make a real profit?

Layoff and Cuts expenses

So, Li Auto's solution is simple: either increase sales or cut expenses. Increasing sales seems difficult now, so they're focusing on layoffs and cutting R&D to preserve profits.

According to Li Auto's guidance, they expect to sell 10.5-11 million vehicles in the second quarter. But with weekly sales around 8,000 vehicles, can they really hit that target?

While sales are uncertain, Li Auto is quite ruthless with layoffs. Over 5,000 jobs were cut, and several electric vehicle models have been pushed back to next year. Hopefully, this will improve their expense situation.

Competition

But after this, Li Auto's weaknesses are clear. Their previous success relied more on being early with extended-range vehicles. But now, with competitors like Huawei also offering extended-range models with fancy features like sofas, fridges, and TVs, Li Auto's appeal is fading. The consequences of intensified competition are now evident.

From a profit perspective, even if they can maintain a 20% gross margin, their profitability is similar to traditional gas-powered carmakers like $Toyota(TM)$ . If that's the case, investors will be very critical of their valuation.

Based on a PE ratio, Li Auto's valuation would be around 10 times its earnings if it achieves an 8% net profit margin and annual revenue of RMB200 billio. But that's only RMB16 billion in net profit, which is close to Toyota's 9.4 PE ratio.

The real question is: when will Li Auto reach RMB200 billion in revenue? In 2023, it was RMB123.9 billion, and analysts expect RMB177.4 billion in 2024.And when will they achieve an 8% net profit margin in this fiercely competitive market?

With so many uncertainties, investors can only rely on sales data to make decisions. If monthly sales don't pick up, the stock price will struggle to perform!