Gross profit margin surpasses Tesla, LI AUTO-W faces a new turning point | Insight Research

On the evening of November 9th, Li Auto released its Q3 2023 earnings report, firing the first shot in the financial reports of new carmakers.

In terms of key performance indicators for the third quarter, Li Auto achieved operating revenue of 34.68 billion yuan, a year-on-year increase of 271.2% and a month-on-month increase of 20.2%. Net profit reached 2.81 billion yuan, a sharp contrast to the -1.64 billion yuan in the same period last year, and a month-on-month increase of 21.8%. The gross profit margin was 22%, an increase of 9.3 percentage points year-on-year and 0.2 percentage points month-on-month.

Huawei's Jizhi Research believes that in the first three quarters of this year, Li Auto has stood out from the intense price war in the new energy vehicle market, achieving record highs in operating revenue, sales volume, profit, and gross profit margin. It can be said to be a breath of fresh air among domestic new carmakers.

However, while Li Auto's products have gained recognition from the domestic market and consumers, there is also a need to face a problem.

In the short term, there is still a limit to Li Auto's performance and sales growth. Despite strong market demand, Li Auto faces its own production capacity constraints. At the same time, whether its upcoming electric vehicle model MEGA can replicate the success of the L series is also a major test for its continued growth.

1. Sales reach new highs, but approaching production capacity bottleneck

In the third quarter of this year, Li Auto's sales reached 105,000 vehicles, setting a new record high and exceeding the sales guidance of 100,000-103,000 vehicles for the previous three quarters. This achieved 10 consecutive months of month-on-month growth. The market was previously concerned that the new model M7 would have a significant impact on Li Auto's sales, but so far, this negative impact has not been clearly reflected in the financial report.

The production capacity bottleneck of Li Auto still exists, as Li Xiang mentioned before, this is a problem that could not be solved in the second quarter and has also emerged in the third quarter. Despite strong market demand, Li Auto's sales growth rate in the third quarter was only 21% month-on-month, compared to 65% in the second quarter.

This indicates that production capacity constraints are affecting Li Auto's sales growth. Li Auto currently operates the Changzhou factory and the Beijing Shunyi factory, with the latter mainly supporting the upcoming electric vehicle model MEGA, while the Chongqing factory has not yet started production. Due to the current reliance on the production capacity of the Changzhou factory, Li Auto's sales growth does face significant challenges.

Although the Changzhou factory is expanding production, reaching a monthly sales volume of 40,000 vehicles in the short term seems to be its current limit. This is also reflected in Li Auto's sales guidance for the fourth quarter of this year, with the company expecting deliveries of 125,000 to 128,000 vehicles. It can be seen that Li Auto's sales growth rate is indeed limited by its current production capacity bottleneck.

3Q Earnings Report: Ideal Automobile Achieves High Growth in Sales and Profits

In October, Ideal Automobile sold 40,000 vehicles, indicating that although sales in November and December may remain at a high level, the momentum of MoM growth may be difficult to sustain. Overall monthly sales are expected to stabilize at around 42,500 vehicles. While Ideal's L-series models have established a solid market foundation, the long-awaited mega electric vehicle models will not contribute to sales in the fourth quarter of this year as they are scheduled for delivery in the first quarter of next year.

Furthermore, it remains uncertain whether the mega models can replicate the sales success of the L-series. Ideal has extensive experience in the plug-in hybrid market, but faces competition from rivals such as BYD Tang D9 and Jike 009 in the upcoming MPV market. New entrants like Xiaopeng X9 and Great Wall's Wei Pai Gaoshan are also making their moves.

Therefore, the success of the mega electric vehicle models in opening up a second growth curve is crucial for Ideal's continued growth.

2. Gross Margin Surpasses Tesla and BYD

While other emerging automakers are still striving for profitability, Ideal Automobile has achieved sustained growth in net profit, making it a leader in the field.

In the third quarter of this year, with the growth in sales, Ideal's net profit reached 2.81 billion yuan, compared to a loss of 1.64 billion yuan in the same period last year, even surpassing the market's expected 2.375 billion yuan. The profit per vehicle also increased from 5,700 yuan in the fourth quarter of last year to 26,800 yuan in the third quarter of this year, continuously reaching new highs.

Furthermore, from the perspective of gross margin, Ideal's gross margin in the third quarter of this year reached 22%, once again surpassing the giants of the new energy vehicle industry, Tesla (Q3 gross margin 17.9%) and BYD (Q3 gross margin 22%). Clearly, despite the pressure from Tesla's price reduction and the resulting price war this year, Ideal has managed to withstand the pressure and its profitability has not been significantly affected.

Finally, Ideal's operating cash flow has also achieved sustained high growth this year, reaching a historical high. In the third quarter of this year, Ideal's operating cash flow reached 14.51 billion yuan, achieving a YoY change from negative to positive, and a QoQ growth of 30.5%.

3. Record High Expenses

While achieving high YoY growth in sales and profits and creating historical highs, Ideal Automobile's research and development expenses and sales expenses have also increased.

In the third quarter of 2023, Ideal's research and development expenses reached 2.82 billion yuan, a YoY increase of 56.1% and a QoQ increase of 16.1%. Such high R&D investment is closely related to Ideal's determination to drive new model development and accelerate intelligent driving technology.The strong performance of Ideal Car's existing models has enhanced the company's confidence in future new models. In addition to the upcoming launch of the first pure electric MEGA model in the fourth quarter, the company also plans to launch three pure electric and one extended-range models next year, making Ideal Car one of the manufacturers with the most diverse range of new energy vehicles.

At the same time, with the launch of Ideal's pure electric strategy, the charging infrastructure, which was previously not given enough attention, will also become a key investment area for the company. The plan is to build over 300 supercharging stations by the end of this year, and increase the number to 3,000 by 2025 to support the demand for pure electric vehicles.

Ideal Car lags behind leading players such as Xiaopeng and Huawei in the field of intelligent driving and has not yet started city trials. As the competition focus of new energy vehicle companies shifts to intelligence, intelligent driving technology has become the key to competitiveness and attracting consumers. Therefore, Ideal Car also needs to increase investment in intelligent driving.

In addition, Ideal is rapidly expanding its urban coverage and sales channel network. By the end of the third quarter of this year, it had 361 retail centers and coverage in 131 cities, an increase of 24 centers and 3 cities compared to the previous quarter. However, the expansion of the channel network has also led to a significant increase in sales expenses. The sales, general, and administrative expenses at the end of the third quarter reached 2.54 billion yuan, an increase of 68.8% year-on-year and 10.2% quarter-on-quarter.

This year, Ideal Car's sales volume has reached a new high, achieving a net profit and a gross profit margin exceeding the industry leader, leaving a deep impression on the market. However, as sales approach the capacity limit, it is still unclear whether the future pure electric models can sustain the growth momentum of extended-range models, and the company's high investment in expenses indicates that new challenges may have just begun.