Defeated by Huawei, can Li Auto still have good days ahead?
Li Auto (LI.O) released its second-quarter 2024 financial report after the Hong Kong stock market closed and before the US stock market opened on the evening of August 28th Beijing time. Despite going through the pure electric Mega's downturn, being intercepted by big brother Huawei in the high-end hybrid segment, the results can only be described as meeting expectations after a general decline, not disappointing everyone:
1. Operating profit has turned from -600 million to nearly +500 million, slightly better than the expected 200 million. However, in terms of the quality of profitability, the difference mainly lies in the restraint on the operational side. After the painful realization from the Mega downturn, the company's research and development, marketing, and administrative expenses have significantly converged compared to the first quarter. Yet, this slight expectation gap is not enough to fundamentally convince the market that Li Auto has successfully turned the tide.
2. The car unit price is "okay," with slightly higher revenue: With a 25% year-on-year growth in sales volume, Li Auto's revenue in the second quarter reached 31.6 billion yuan, an 11% year-on-year increase, exceeding expectations by 2 billion yuan. This difference is due to the slightly higher car unit price compared to the market estimate.
3. Achieving a 18.7% gross profit margin per vehicle, completing the Mega challenge: Factors such as a. L8 and L9 being intercepted by M9, slowing down sales of high-end cars; b. price reductions across the entire L series except for L6; c. a significant increase in the proportion of L6 sales, leading to an overall price decrease. The decline in Li Auto's average car price this quarter is certain, it's just a matter of how much.
The actual average car price dropped from over 300,000 yuan to 279,000 yuan, slightly lower than the market's expected 276,000 yuan. The corresponding gross profit margin per vehicle of 18.7% is also slightly better than the market's expected around 18.4%.
5. Lack of confidence in third-quarter sales guidance: With July and August almost concluded, assuming Li Auto can maintain the current weekly sales trend, it is estimated that Li Auto's third-quarter sales should be between 150,000 to 155,000 units.
However, the actual sales guidance provided by Li Auto for this quarter is 145,000 to 155,000 units. Although the upper limit is within the estimate, the main issue this time is that with only one month left, Li Auto's range of upper and lower limits differs by up to 10,000 units, whereas in the past it was usually between 1,000 to 5,000 units.
Here, it is worth questioning whether Li Auto, after being educated by the market and competitors, lacks confidence in its ability to execute its targets. Especially with the lower limit guidance of 145,000 units, implying a possibility of deteriorating weekly sales in September.
6. Is Li Auto quickly heading towards a unit price of 260,000 yuan? The lack of confidence is also reflected in the addition of the revenue guidance of 39.4-42.2 billion RMB. The implied unit price is only around 263,000 yuan, which is significantly lower than the second quarter's 279,000 yuan or the market's expected 270,000 yuan.
With such a downward implied unit price, the market naturally worries: Will L8/9 be further squeezed in sales by M9, leading to a passive increase in L6 sales? Will there be another price reduction in selling cars? Can the gross profit margin once again reach 19-20% as scheduled?
Dolphin's overall view:
From the perspective of expected deviation, the slight overperformance of Li Auto's car business in the second quarter is neither good nor bad. However, the guidance given for the third quarter, whether it is the widened sales guidance range or the implied selling price, indicates that in the face of intensifying market competition, Li Auto has discounted its confidence in its execution capabilities and competitiveness, and the possibility of price cuts cannot be ruled out in the future.
Of course, the incident of the pure electric Mega car overturning in the first quarter is basically over. But behind the overall decline in unit prices, the embarrassment Li Auto faces is that after the complete failure of the pure electric trial at the beginning of the year, when cleaning up the mess, it was found that the hybrid main battlefield was also on fire: Huawei's Aito came aggressively with the M9, leading to continued pressure on the sales of Li Auto's L8 and L9. With no new cars this year, Dolphin is a bit worried about the follow-up momentum of L6 orders and the potential for price cuts.
Looking at the second half of the year, although there are no new cars in the pure electric segment, Li Auto is still vigorously investing in charging piles. In the hybrid segment, the outstanding performance of Huawei's Aito has significantly dampened Li Auto's momentum. Looking ahead to 2024, Li Auto's pressure remains high.
Fortunately, from a valuation perspective, the market has already felt the threat from Huawei through various reports and has priced this competition into Li Auto's stock price. Currently, in terms of fundamental trends, Li Auto's sales and gross profit margin are both improving, and performance will continue to show an upward trend.
However, to truly invest in and hold Li Auto with peace of mind, this turning point has not been seen yet, and we can only wait to see if Li Auto can unexpectedly break through in the pure electric segment next year.
The following is a detailed analysis:
Since Li Auto's sales volume has been announced, the most important marginal information is: 1. Second-quarter gross profit margin; 2. Performance outlook for the third quarter of 2024.
I. Car business gross profit margin for the second quarter is 18.7%, slightly higher than the market's expected 18.4%
As Li Auto had previously provided guidance on the gross profit margin for the second quarter car business, with the contribution of L6 increasing, the gross profit margin for the second quarter car business was expected to slip to around 18%. Therefore, the market's consensus expectation was around 18.4%. However, based on the actual performance this quarter:
Li Auto's second-quarter car business gross profit margin is 18.7%, compared to 19.3% in the first quarter of this year, continuing to decline by 0.6% on a quarter-on-quarter basis, slightly higher than the guidance and market expectations, with the main reason for the slight overperformance being the higher-than-expected unit price.
(Note: The car sales gross profit margin data for the third quarter of 2022 is after deducting 800 million + contract loss impact, and the car sales gross profit margin data for the fourth quarter of 2023 is after deducting 400 million warranty deposit)
Analyzing from an individual car economics perspective:
1. Continued price reductions across the board + increased proportion of lower-priced L6 resulting in a 22,000 decrease in unit price on a quarter-on-quarter basis
The average unit price in the second quarter was 279,000 yuan, selling 22,000 less per vehicle compared to the previous quarter, but exceeding the market's expected 276,000 yuan and Dolphin's estimated unit price of 272,000 yuan based on the second-quarter guidance. The quarter-on-quarter decline in car prices this quarter is mainly influenced by three factors
Li Auto reduced prices for all models on April 22, with price reductions ranging from 18,000 to 30,000 yuan, a decrease of around 4% to 6%.
Owners who had purchased Mega, 2024 series, and L series vehicles before the price reduction announcement will be compensated through price difference payments (L series owners will receive a cash rebate of 15,000 to 20,000 yuan, while Mega owners will receive a cash rebate of 30,000 yuan).
The low-priced L6 model was launched in April as part of this quarter's delivery structure (priced at 249,800 to 279,800 yuan), accounting for 36% of the model structure in the second quarter. However, the L8+L9 models were significantly impacted by competition from Huawei's Aito M9, with their share in the model structure dropping by 22% in the second quarter.
2. The increase in sales volume has led to the release of economies of scale, with a per-vehicle cost decrease of 16,000 yuan compared to the previous quarter.
In the second quarter, Li Auto's per-vehicle cost was 227,000 yuan, a decrease of 16,000 yuan from the previous quarter. With a 35% increase in sales volume this quarter, economies of scale have been realized, leading to a decrease in per-vehicle amortized costs.
3. Finally, the gross profit per vehicle in the second quarter was 52,000 yuan.
In terms of the profitability of each vehicle, Li Auto made a gross profit of 52,000 yuan per vehicle in the second quarter, a decrease of 6,000 yuan from the first quarter. The overall gross profit margin from selling cars decreased from 19.3% in the first quarter to 18.7% in the second quarter.
II. Sales guidance for the third quarter of 2024 is mediocre, but implied unit price continues to decline.
a) Sales target for the third quarter of 2024: 145,000 to 155,000 vehicles, lower than Dolphin's expectations of 156,000 vehicles.
In the second quarter, with the rapid climb of the L6 model driven by Li Auto's April price reduction of 18,000 to 30,000 yuan across all models, Li Auto's delivery volume reached 109,000 vehicles, a 35% increase compared to the previous quarter.
Li Auto's delivery guidance for the third quarter is 145,000 to 155,000 vehicles, representing a 33% to 42% increase from the 109,000 deliveries in the second quarter. Dolphin believes that this sales guidance reflects a lack of confidence, as the range of this guidance is significantly different from the past. In the past, the difference between high and low range guidance was usually only two to three thousand vehicles, but this time it is tens of thousands of vehicles, and it is also lower than Dolphin's expected 156,000 vehicles.
Based on the current sales trend, with 51,000 deliveries known in July and an estimated 51,000 to 52,000 deliveries in August based on the latest weekly sales data, it also means that September deliveries are expected to be only 42,000 to 52,000 vehicles, almost unchanged or possibly even lower compared to the previous month, indicating a reduced level of confidence behind the guidance.
b) Implied unit price continues to decline on a month-on-month basis, lower than the market's expected 270,000 yuan
In addition to the sales volume guidance, the revenue guidance for this quarter is between 39.4 billion and 42.2 billion. Estimated based on the contribution of other business revenues of 1.38 billion, the implied unit price for the automotive business guidance is only 263,000, a decrease of 16,000 from the previous quarter, still below the market expectation of 270,000.
The main reasons for the decline are as follows:
1) The proportion of L6 in the vehicle model structure is expected to continue to increase (the proportion of L6 in July has already increased to 50%), while the high-priced and high-margin L9 may continue to decline in proportion in the vehicle model structure under the competitive pressure from Aito's M9;
2) Li Auto provided limited-time promotional activities for the entire vehicle lineup from July 1st to July 15th, including a 10,000 yuan limited-time car purchase benefit (including 5,000 yuan optional fund, 5,000 yuan for a 7kw charging pile or direct deposit deduction of 5,000 yuan), as well as zero down payment and a 2.5% interest rate car financing subsidy plan.
However, with such a significant decline in unit price in the third quarter, the market naturally worries: will L8/9 be further squeezed in sales by M9, leading to a passive increase in L6 sales? Will there be another price reduction for car sales? Can the gross profit margin once again move towards the expected 19-20%?
IV. Operating expenses show restraint in cost reduction and efficiency improvement
1) Research and development expenses: Basically flat compared to the previous quarter
This quarter, Li Auto's research and development expenses were 3.03 billion, basically flat compared to the previous quarter, slightly lower than the market expectation of 3.1 billion.
The research and development expenses in the previous quarter were data of an investment pace that was not adjusted (based on the original sales target of 650,000 to 800,000), while the research and development expenses in this quarter were mainly offset by the decrease in research and development personnel compensation due to layoffs, but increased expenses to support the expansion of product portfolio and technology (investment in pure electric platforms and intelligence), overall research and development expenses are basically flat compared to the previous quarter.
In terms of intelligentization progress, Li Auto has already pushed the "Nationwide Drive" without maps NOA to AD MAX users, and the speed of city opening has gradually caught up with the first echelon of Li Auto and XPeng. The upgrade of intelligentization also helps to increase the proportion of AD Max models (Li Auto expects AD Max model orders to account for about 70% of the total order volume of products priced above 300,000 yuan).
In terms of intelligent driving algorithms, Li Auto has also shifted its focus from rule-driven algorithms to end-to-end large model solutions led by Tesla. Compared to rule-driven algorithms, end-to-end algorithms require fewer personnel, so the number of personnel in Li Auto's intelligent driving team has been reduced from the original 2,000 to within 1,000.
2) Sales and management expenses: Reduction in sales and management expenses due to layoffs and reduced marketing activities
This quarter, sales and management expenses were 2.82 billion, a decrease of 160 million compared to the previous quarter, lower than the market expectation of 2.95 billion, mainly due to the reduction in marketing and promotional activities and the decrease in sales and management personnel compensation due to layoffs.
At the same time, Li Auto has shown more restraint in opening stores, with only 23 new stores added in the second quarter, a significant slowdown compared to the peak in the fourth quarter of last year (106 new stores added in the fourth quarter of last year). In July, 10 directly operated stores were closed, focusing on improving single-store sales revenue and after-sales service (65 new after-sales service centers were added this quarter)
V. Both the revenue side and gross margin side basically meet market expectations
With the sales volume already announced, Li Auto's total revenue in the second quarter was 31.7 billion, up 24% from the previous quarter, slightly higher than the market's expected 31.4 billion.
The slightly higher revenue than expected is mainly due to the slightly higher per-vehicle price in the automotive business than the market expected, while the performance in other businesses (insurance, used cars, etc.) declined by 0.2 billion compared to the previous quarter, lower than the market's expected 1.45 billion.
The overall gross margin in this quarter basically meets expectations. Although the gross margin of the automotive business slightly exceeded expectations, the gross margin of other businesses decreased by 6.7% compared to the previous quarter to 36.3% in this quarter, lower than the market's expected 44.9%. Finally, the gross margin for the second quarter was 19.5%, basically in line with the market's expected 19.6%.
VI. Cost reduction, efficiency improvement, and operational leverage release lead to positive operating profit this quarter
In the second quarter, Li Auto's operating profit, which is relatively significant, turned positive. The absolute value increased from -0.6 billion in the previous quarter to 0.47 billion in this quarter, with the operating profit margin increasing from -2.3% in the first quarter of this year to 1.5% in the second quarter, exceeding the market's expected 0.6%.
Looking at the core, although there was a slight decline in the gross margin side compared to the previous quarter, this quarter saw a decrease in operating expenses due to cost reduction and efficiency improvement, while the operational leverage was released with the rebound in sales volume. Ultimately, operating expenses were lower than market expectations, leading to an increase in the operating profit margin.
The net profit for this quarter only increased by 0.5 billion compared to the previous quarter, mainly due to a significant decrease in interest income this quarter, dropping from 1.07 billion in the previous quarter to 0.37 billion in this quarter. After adjusting for SBC, the net profit was 1.5 billion. Despite the decrease in interest income and SBC compared to the previous quarter, it only increased by 0.23 billion.
VII. However, operating cash flow remains negative
The operating cash flow for this quarter was -0.43 billion, an improvement of 2.9 billion compared to -3.3 billion in the first quarter, but it still remains negative. This is mainly because, on one hand, although there was a significant improvement in the operating profit side, the Non-GAAP net profit only increased by 0.23 billion compared to the previous quarter due to the decrease in interest income and SBC. On the other hand, although the inventory issue was somewhat alleviated this quarter (excessive optimism in sales volume forecasts led to a doubling of inventory levels), it still remains at historically high levels (83 billion in this quarter) , still in the inventory digestion phase.
This quarter's capital expenditure was 1.4 billion, a decrease of 300 million compared to the previous quarter, lower than the market's expected 1.7 billion. The main investment in capital expenditure this quarter was in supercharging stations. In the second quarter, 257 new supercharging stations and 1182 supercharging piles were added, almost doubling, in preparation for the launch of Mega and pure electric vehicle models in the first half of next year. Previously, in the Capex guidance given by the company, it was estimated that about 1.5 billion would be invested in supercharging stations this year.
The quarter-on-quarter decline in capital expenditure this quarter may be due to the delay in mass production of pure electric vehicle models until the first half of next year, and Capex will also be automatically postponed.
For historical articles by Dolphin, please refer to:
May 20, 2024 Financial Report Review "Li Auto: Profit Collapse! The moment of testing faith has come"
May 20, 2024 Conference Call Minutes "Postponing the release of pure electric SUV to the first half of next year (Li Auto 1Q24 conference call minutes)"
March 4, 2024 Li Auto Conference "Li Auto Conference: Slightly improve product strength, resolutely not reduce prices, a small attempt at pure electric vehicles"
February 26, 2024 Financial Report Review "Li Auto: Not being a "big mouth", just working hard" Minutes of the telephone conference on February 27, 2024: "No models below 200,000 yuan will be launched in the next 5 years"
Financial report review on November 9, 2023: "New players vs. old players, can Li Auto compete with Huawei?"
Minutes of the telephone conference on November 9, 2023: "Making autonomous driving a core goal (Li Auto 3Q23 telephone conference minutes)"
Financial report review on August 8, 2023: "Peeling back the layers to see Li Auto: Is the 'ideal' really that 'ideal'?"
Minutes of the telephone conference on August 8, 2023: "Li Auto minutes: Production bottleneck in components, gross margin guidance maintained at 20%+"
Financial report review on May 10, 2023: "Li Auto: Leading in performance, the new force leader Fan has a grasp"
Minutes of the telephone conference on May 10, 2023: "Li Auto minutes: Leading in market share, 20% gross margin target unchanged" 2023 年 2 月 27 日财报点评"Li Auto: Strong as a Tiger? Competition Stable as a Dog"
2023 年 2 月 27 日电话会纪要"Li Auto: "Capture 20% Market Share of 300-500k Luxury SUV Market in 2023"
2022 年 12 月 9 日财报点评"Li Auto's Profit Plunge? Not Fatal, but Quite Awkward"
2022 年 12 月 9 日电话会纪要"2023, Li Auto Aims for "Hundred Billion" Revenue, All-Electric"
2022 年 8 月 16 日财报点评"Li Auto Thunderous, L9 Can't Support "Collapsed Ideal""
2022 年 8 月 16 日电话会纪要"Li Auto ONE Eaten by L9, L8 to be Sold Early (Meeting Minutes)"
2022 年 6 月 22 日， 产品发布精要"Li Auto L9, A New "Ideal" for Li Auto"
2022 年 5 月 10 日， 会议纪要"Li Auto: Three New Models to be Launched in 2023, Welcoming a Strong Product Cycle"
2022 年 5 月 10 日， 财报点评"Li Auto's Ideal, All Hopes Resting on the Second Half of the Year?"
2022 年 2 月 26 日， 会议纪要"Completing the 0-1 Validation Period, Witnessing Li Auto's Growth from 1-10 (Meeting Minutes)" On February 25, 2022, live performance briefing "Li Auto (LI.US) 2021 Q2 Earnings Call" (link)
On February 25, 2022, financial report review "Fully Demonstrating the Ability to Generate Cash, Li Xiang's Ideal Comes into Reality" (link)
On November 30, 2021, meeting minutes "Launching Pure Electric Models Right After Xiaomi, How Does Li Auto Compete? (Meeting Minutes)" (link)
On November 29, 2021, live performance briefing "Li Auto (LI.US) 2021 Q3 Earnings Call" (link)
On November 29, 2021, financial report review "Outperforming Xiaopeng and Nio in Making Money, Is Li Auto Speculative or Long-term Oriented?" (link)
On August 31, 2021, meeting minutes "Li Auto: Outperforming Nio and Xiaopeng in Q3, Aiming for 150,000 Units Next Year (Meeting Minutes)" (link)
On August 30, 2021, live performance briefing "Li Auto (LI.US) 2021 Q2 Earnings Call" (link)
On August 30, 2021, financial report review "Li Auto: Solid Performance, Strong Momentum Ahead?" (link)
On June 30, 2021, Three Idiots Comparative Study - Part II "New Forces in Car Manufacturing (Part II): Doubling in Fifty Days, Can Three Idiots Continue to Charge Forward" (link)
On June 23, 2021, Three Idiots Comparative Study - Part I "New Forces in Car Manufacturing (Part I): Market Enthusiasm Declines, How Do Three Idiots Consolidate Their Position?" (link)
On June 9, 2021, Three Idiots Comparative Study - Part I "New Forces in Car Manufacturing (Part I): Investing in the Right People, Doing the Right Things, Analyzing the People and Events of the New Forces" (link) Risk Disclosure and Disclaimer for this article: Dolphin Research Disclaimer and General Disclosure
