To The Moon

$Li Auto(LI)$ $LI AUTO-W(02015)$ 's latest earnings report has been a mixed bag. The stock saw a sharp pre-market rise but quickly turned negative before inching up again. The market reaction reveals the underlying concerns.

Compared to analysts' expectations, Li Auto's Q2 revenue slightly exceeded forecasts, but adjusted net profit was disappointing. The mixed stock performance reflects the cautious outlook on Li Auto's earnings report.

Earnings highlights

- Revenue: Li Auto's Q2 revenue hit ¥31.7 billion, slightly surpassing the analyst estimate of ¥31.4 billion. This represents a 10.6% year-over-year increase. Revenue from vehicles sales was ¥30.3 billion, up just 8.4% year on year.

- Sales: The company sold 108,581 vehicles in Q2, up 25.5% from last year.

While sales growth is strong, revenue growth is lagging behind. This is mainly due to the increased proportion of the lower-priced L6 model, which has reduced average revenue per vehicle. In Q2, Li Auto’s average revenue per vehicle was ¥279,000, a 13.6% decline year-over-year.

The L6, launched in April at around ¥250,000, has been a hit, helping Li Auto recover from a sluggish start to the year.

Q3 Outlook

Looking ahead to Q3, Li Auto expects sales between 145,000 and 155,000 vehicles, reflecting a 38% to 47.5% increase from last year.

With July’s sales at 51,000 vehicles, and following the company’s usual trend of exceeding expectations, August and September should see average monthly sales of 52,000 vehicles, setting a new record.

Revenue for Q3 is projected to be between ¥39.4 billion and ¥42.2 billion, up 13.7% to 21.6%, exceeding analysts' expectations of ¥39.7 billion.

Slim Profie

While revenue and guidance look good, profits are less impressive. The overall gross margin for Q2 was 19.5%, slightly above the forecast of 19.3%. The gross margin for the automotive business was 18.7%, beating the expected 18.4%.

Although the gross margin exceeded expectations, it fell by 0.6 percentage points from Q1, mainly due to the lower profitability of the L6 compared to higher-priced models.

Expenses Rise

Despite the margin drop, Li Auto's expenses continued to rise sharply. In Q2, sales and administrative expenses were ¥2.8 billion, up 22% year-over-year, while R&D expenses were ¥3 billion, up 24.8%.

Both expense growth rates exceeded the 10.6% revenue increase, pushing the expense ratio up by 1.9%.

With such significant expense growth, Li Auto's operating profit margin was just 1.5% in Q2, which is disappointing.

Management noted that as L6 production stabilizes and cost-saving measures take full effect, profitability and cash flow are expected to improve in the second half of the year.

While this reassures investors, it also highlights the ongoing issue of low profitability in the EV sector. Li Auto's net profit was only ¥1.1 billion, down 52% year-over-year, with a net margin of just 3.5%.

Valuation

Even if we project a future revenue of ¥200 billion with a 5% net margin, Li Auto's P/E ratio would be around 16x, higher than traditional automakers like $Toyota(TM)$ , which have single-digit valuations.

Previously, Li Auto could boast high growth, but with increasing market competition and slowing revenue growth, a Q3 growth rate of 21.7% (at the guidance upper limit) is unlikely to command a valuation premium.

This might explain the erratic pre-market stock movements following the earnings report.