Li Auto’s Q4 Returned to Profit on Cost Control

No-moat Li Auto LI delivered in-line fourth-quarter revenue that was at the high end of company guidance. Vehicle margin of 20% for the quarter was also in line with our expectation, with promotions on the last-generation Li One offsetting a better product mix. Benefiting from lower operating expense levels and interest income on bank deposits, the company turned around, with net profit of CNY 257 million from accumulated net loss of CNY 2.3 billion in the first nine months of last year. We reduce our net loss forecast for 2023 and maintain our view that Li Auto will turn profitable in 2024. We lift our fair value estimate to USD 30.50 per ADS (HKD 119 per share) from USD 29 per ADS (HKD 113 per share). Our fair value implies a forward 2023 price/sales ratio of 2.2 times.

For the first quarter of this year, management guided vehicle delivery to grow 64%-73% year over year to 52,000-55,000 units, and for total revenue to increase 82%-93% year over year to CNY 17.45 billion-CNY 18.45 billion. The midpoint of the delivery guidance implies a monthly sales volume of around 19,000-20,000 units for February and March, which we believe is in line with market expectation of about 20,000 units.

Despite strong first-quarter vehicle delivery guidance, management is conservative in guiding only around a 20% gross margin level despite the higher-priced L9′s full-year contribution. We believe this reflects some uncertainty around consumer sentiment, market competition, and negative margin impact from launch of pure battery electric vehicles, or BEVs, later this year. We retain our view that intensifying competition from BEVs will shrink the cost advantage Li Auto established with plug-in hybrid electric vehicles, due to decreasing battery cost over the next five years. We expect the company’s vehicle margin to record sequential recovery with improving sales contribution from L9, but will be under pressure next year when Li Auto launches its BEV model.