Li Auto: New Leader in China's Emberging NEV Players

Li Auto (LI.O) released its Q1 2023 financial results before the US stock market opened on May 10th. Li once again defined what a stable new force in the automotive industry is:

1. Sales guidance is "firm and steady": After exploding deliveries in April, the Q2 auto delivery guidance is 76,000 to 81,000 units, which is significantly higher than the market's expected 73,000 units.

However, due to the strong sales of L7 and L8 Air in April, the latest actual market expectation should be slightly higher than 73,000. Judging from the trend of implied sales volume from the guidance, it is not very likely to hit 30,000 in June though the company said it hoped to reach this number.

2. Lower unit prices put pressure on GPM upside room: The company's revenue guidance is between 24.22bn and 25.68bn, which is still significantly higher than the market's expectations.

However, the Q2 automobile unit price implied behind this guidance may not exceed 31.5k RMB, while the current cheapest model L7 Air's starting price is 31.98k，meaning that the subsequent explosive sales models may mainly from this relatively low-priced car, while the sales of the high-priced car L9 may be under pressure.

3. Stable per-vehicle GPM in Q1: The GPM of the car sales business is 19.8%, barely touching the market's expectations. However, considering that the GPM of peers in Q1 generally fell, Li's performance is quite stable.

4. Ultimate shoucase of operational efficiency: Li's cost control ability is obvious to all, and it has reached the extreme in Q1. The R&D expenses even showed a mom decline for the first time. Although the sales expenses increased by less than 100mn RMB mom due to the launch of new cars, Li finally delivered its first positive operating profit, while the market expected an operating loss.

Dolphin's overall view:

The Q1 performance and Q2 guidaLnce are completely consistent with the spiritual core conveyed in the previous financial quarter: Li can deliver what it says, respond efficiently to market changes, and execute strategy changes efficiently.

A performance is a test of a company's comprehensive strength, and Li's comprehensive strength is worthy of praise.

From the stability perspective, Li is naturally very reliable. However, if we invest in Li from the perspective of marginal changes, the company has already put the monthly sales guidance for the future between 25,000 and 30,000 units. Judging from the Q2 sales guidance, the goal of selling 30,000 units per month throughout the year may still be a relatively challenging target, and auto deliveries have been locked in a rough range.

Under this circumstance, this year's revenue upside should come from the improvement of GPM. The company hopes its GPM to achieve more than 20%, and the steady-state L series should be around 25% as production runs to full gear.

However, whether it is from the actual performance of GPM in Q1 or the implied GPM expectation in the significant decline in Q2 unit prices, it is not particularly optimistic.

Currently, all cards has been on the table for Li in terms of product lineup. From the perspective of incremental benefits, it seems that there won't be much Alpha returns if you invest in Li Auto at this time without a significant improvement in GPM.

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The detailed analysis is as follows:

1. Actions speak louder than words, and sales are the best interpretation

As NEV market dynamics turn from the supply-oriented to the demand-oriented, companies that have strong execution records start to stand out. The three new forces(Li,Nio and XP) have had very different fates due to their different levels of execution reliability, and Li is obviously the leader among them.

1) Act quickly: In the face of market changes, Lis quickly adjusted the pace of new car releases, and the time gap between release and deliveries was very narrow. The L9, L8, and L7 models released at the beginning of the year had already delivered most of the vehicles in the first quarter, and entered full-scale delivery in the second quarter.

2) Do what you say: Previously, Li gave a sales guidance of 52,000-55,000 vehicles for the first quarter, implying that the monthly sales in March would exceed 20,000, which beat the market. Moreover, in the phone meeting, they emphasized that the monthly sales in the future should reach between 25,000 and 30,000.

Lis delivered what they promised: The sales volume in March actually exceeded 20,000, and after the entry-level L7 Air with a starting price of 320,000 yuan was officially delivered in April, the sales volume in April had already exceeded 25,000. In addition, it was surprising that the oldest model, Li One, also had an increase in monthly sales in April.

In the first quarter, a total of 52,600 vehicles were delivered, which was at the lower end of the company's guidance, but it basically completed the guidance, a very good performance given peers’ sluggish sales.

3) Strong sales guidance for Q2

By early April of this year, Lis had already started delivering all models of the four cars they have released so far, L7, L8, L9, and One. Especially in April, two Air versions of L7 and L8 started deliveries, lowering Li family’s entry price by 20,000 yuan. With the release of Air, the monthly sales of L7 directly exceeded 10,000.

For the delivery expectations in the second quarter, the company predicts 76,000-81,000 vehicles, which means that the average monthly delivery should be above 26,000 vehicles. Since 25,700 vehicles were delivered in April, it is likely that May will only slightly exceed April, and it will be difficult to reach 30,000 units in June.

Q2 Unit Price Down, Little Hope for Gross Margin Improvement?

The company expects Q2 revenue to be between RMB 24.22bn and RMB 25.68bn. With such strong delivery guidance, revenue guidance also exceeded expectations.

However, the implied unit price in the guidance, estimated by Dolphin, is expected to be within RMB 315,000, is significantly closer to the cheapest model, L7 Air, which is priced at RMB 319,800. The Q1 average unit price for the Li was RMB 349,000, indicating that the expected main sales volume in the guidance is mostly L7 Air, and that the sales volume of the most expensive model, L9, is under pressure.

The company previously stated that the long-term GPM of the L series should be above 25%, and that it hopes to achieve a gross margin of over 20% this year. With delivery rampup of the L series platform increasing in the future, the market originally had expectations of gross margin improvement.

However, if the Q2 unit price is to drop this much, it is unknown how much the gross margin can actually be improved.

Currently, the Q1 GPM for automobile sales is 19.8%, barely meeting the market's expected 19.9%. From the Q1 unit economics, it is clear that the decrease in unit price has affected the profitability of each vehicle:

a.The Q1 unit price was as high as RMB 348,500, sold nearly RMB 25,000 per car less than the previous quarter;

b.The unit cost was nearly RMB 280,000, and the cost per car decreased by RMB 18,700;

c.The gross profit per vehicle was nearly RMB 69,000, which was nearly RMB 6,000 less than the previous quarter;

Overall, due to the excessive decline in unit price, even with the high cost of lithium carbonate and other materials falling, the GPM is still declining.

(Note: The Q3 data for automobile sales GPM last year was after deducting RMB 800mn+ contractual losses)

Q3, As delivery is Stable, Revenue Is Stable

With sales being the biggest determinant of revenue, this quarter's total revenue for Li is RMB 18.8bn, which is almost exactly in line with market expectations.

Among them, the revenue from automobile sales was RMB 18.3bn, a yoy increase of 97% driven by both unit price (up 19% YoY) and sales volume growth (up 66%).

Although the same period last year was the replacement period for Li models, meaning a low base, this YoY increase at least indicates that Li has successfully replaced its models.

Four, Crazy deliveries to the Outside, "Save Save Save" to the Inside

Up to now, it is obvious that Li has invested in discipline and investment efficiency. In the first quarter, Li further played this "bright spot" to the extreme:

In the first quarter, Li's R&D expenses fell back to 1.85bn yuan in absolute value. Perhaps due to factors such as year-end bonuses in the fourth quarter, there was a slight decline in the first quarter. However, in the short history of Li's listing, there has never been such sequential R&D expense falls. The control of headcount and personnel expenses is obvious.

Moreover, Li's sales and administrative spending discipline has always been outstanding: sales/administrative expenses are 1.65bn yuan, significantly lower than the market's expected 1.9bn yuan+.

One of the major expenses on sales expenses is the expansion of the sales network. However, at the end of the first quarter, the number of new stores was not large. Li opened 11 new retail stores and expanded to two cities during the period, while the after-sales service center remained basically the same.

The company's previous guidance for the increase in store numbers in 2023 was 130. In the first quarter, Li's store expansion was still relatively slow, and the growth in sales mainly relied on a significant increase in single-store sales. We can observe whether Li's sales network will quickly increase in the second half of the year.

Abundant Cash on Hand

While maintaining sales volume, Li achieved positive operating profit for the first time in Q1 even including non-cash expenses such as equity incentives: the market expected an operating loss of 270mn RMB, but the actual operating profit was 410mn RMB.

In addition, the operating cash flow in the first quarter was even stronger, reaching 7.8bn yuan, and the free cash flow also reached 6.7bn yuan due to the reduction in capital expenditures.

It seems that precise product positioning and efficient execution have allowed Li to pushed all key metrics to the next level:

1. Sales volume hit a new high

2. GPM is basically maintained;

3. With extreme cost control, Li's operating and free cash flow have reached new highs, and this war seems to have been fought with ease.

For Dolphin’s past articles, please refer to:

February 27, 2023 financial report review "Li is as fierce as a tiger? Competition is as stable as a dog"

February 27, 2023 telephone conference summary "Li: "In 2023, we will take 20% of the 300,000-500,000 luxury SUV market""

December 9, 2022 financial report review "Li's profit collapse? Not fatal, but very embarrassing"

December 9, 2022 telephone conference summary "In 2023, Li will have a pure electric vehicle with a market value of 100bn yuan"

August 16, 2022 financial report review "Li's thunderous sound, L9 can't support the "collapsed Li""

August 16, 2022 telephone conference summary "Li ONE was "eaten" by L9, L8 will be sold early (meeting minutes)"

June 22, 2022, product release summary "L9, Li's new "Li""

May 10, 2022, conference summary "Li: Three new products will be launched in 2023, ushering in a big year of product cycle"

May 10, 2022, financial report review "Li's Li, all hopes are pinned on the second half of the year?" On February 26, 2022, meeting minutes "Completion of the verification period from 0 to 1, seeing how the Li can achieve growth from 1 to 10 (meeting minutes)" were released.

On February 25, 2022, the performance briefing live broadcast "Li Motors (LI.US) Q4 2021 Earnings Conference Call" was held.

On February 25, 2022, the financial report review "Pulling the "money-making" ability, Li Xiang's Li shines into reality" was released.

On November 30, 2021, meeting minutes "With Xiaomi releasing pure electric vehicle models one after another, how does Li Motors compete? (Meeting minutes)" were released.

On November 29, 2021, the performance briefing live broadcast "Li Motors (LI.US) Q3 2021 Earnings Conference Call" was held.

On November 29, 2021, the financial report review "Is Li Motors opportunistic or long-term oriented, earning more than Xiaopeng and NIO?" was released.

On August 31, 2021, meeting minutes "Li Motors: Outperforming NIO and Xiaopeng in Q3, aiming for 150,000 vehicles next year (meeting minutes)" were released.

On August 30, 2021, the performance briefing live broadcast "Li Motors (LI.US) Q2 2021 Earnings Conference Call" was held.

On August 30, 2021, the financial report review "Li Motors: Steady performance, strong momentum?" was released.

On June 30, 2021, the second part of the Three Stooges comparison study "New forces in car-making (Part 2): Fifty days of doubling, can the Three Stooges continue to run wild?" was released. On June 23, 2021, Three Idiots Comparative Study - Part II "New Forces in Car Making (II): With the Decrease of Market Enthusiasm, What Does Three Idiots Rely on to Consolidate Its Position?"

On June 9, 2021, Three Idiots Comparative Study - Part I "New Forces in Car Making (I): Invest in the Right People and Do the Right Things, Analyzing the People and Events of the New Forces"

Risk Disclosure and Statement of this Article: Dolphin Analyst Disclaimer and General Disclosure