Li Auto: Profit Plunge! The moment of testing faith has arrived

Li Auto (LI.O) released its first-quarter financial report for 2024 after the Hong Kong stock market closed and before the US stock market opened on the evening of May 20th Beijing time. Despite the Mega drama, the across-the-board price cuts in the L series, and the adjustment of sales guidance after severe overestimation by the company, the first quarter still turned out to be a bust, with two main points of concern:

1. Directly turning into a nearly 600 million loss, operating profit bust: The company reported a close to 600 million operating loss, while the market expected close to 1 billion in operating profit, directly indicating a directional error in profit and loss. If the sell-side expectations on Bloomberg are lagging, Dolphin sees recent reports from outsiders with expectations also around four to five billion in operating profit, so this operating loss is a significant expectation gap.

2. Market underestimated expenses too much! How did this loss come about? In simple terms, the nature of investments in R&D and operating expenses such as marketing/administration (Opex) was much higher than market expectations. Actual combined expenses are around 30 billion, while the market estimated R&D expenses at 25 billion +, and marketing/administration at less than 22 billion. In Dolphin's own expectations, mainly in marketing expenses, there was an underestimation of about 200 million.

3. Revenue guidance implies a gross margin risk: In comparison to the profit bust, Dolphin believes that the hidden risk behind the revenue guidance in gross margin may be more severe. The implied per-vehicle price behind the sales volume + revenue guidance (299-314 billion) is likely around 272,000, down at least three thousand from the 300,000+ in the first quarter. If Li Auto cannot effectively pass on this cost reduction to upstream suppliers, there is a significant risk to Li Auto's gross margin in the second quarter, with current market expectations possibly slightly lower than the 19% gross margin in the first quarter.

4. Other first-quarter indicators are passable: Despite the clear drop in sales volume, the key per-vehicle automotive sales revenue was 302,000, with an automotive gross margin of 19.3%, which is still reasonable. The first-quarter price cuts were mainly focused on clearing old inventory in January, and there was still some support from higher-priced Mega models structurally. The per-vehicle price and gross margin in the first quarter were still acceptable.

5. Second-quarter sales guidance is on track: The company expects second-quarter sales of 105,000-110,000 vehicles, and with current weekly sales driven by the L6 model already back to 8,000, the sales guidance is generally within market expectations.

Dolphin's overall view:

From the perspective of the overall performance expectation gap in the first quarter, the obvious problem lies in R&D, sales/administrative expenses, where the market's expectations were too low.

In fact, the first quarter of this year can be said to be Li Auto's "period of incorrect self-awareness," with no time to adjust the pace of business investment: the first quarter was a complete failure for Li Auto's Mega, and in terms of resource preparation, Mega even led to a disruption in the original rhythm of the L seriesDespite the lower sales volume, Li Auto is still pushing forward with an annual target of 650,000 to 800,000 vehicles, which inevitably corresponds to higher research and development as well as sales expenses.

Especially in terms of sales expenses, Li Auto saw a significant increase in the number of stores in the fourth quarter of last year, mostly concentrated in the second half of the year, particularly in December. These costs associated with store expansion will be fully accounted for in the first quarter, even if only 7 new stores were added in the first quarter.

Of course, this year, due to the need to invest in pure electric vehicle research and development and expand the charging network, the reduction in research and development and capital expenditure may be limited, mainly focusing on improving sales, production, and internal operational efficiency.

However, at least the adjustment in investment pace is already underway. It has recently been reported that nearly 5,700 employees (close to 20% of the total number of employees at the end of last year) will be laid off. Therefore, to some extent, the operating loss in the first quarter caused by Opex exceeding expectations is not particularly serious. Especially considering that apart from BYD, most peers are also experiencing losses, using losses to defend market share can be forgiven.

The more serious issue in this performance, in the view of analysts, lies in the guidance behind the expected gross profit margin: the significant sales revenue of over 270,000 vehicles implies that a large portion of sales volume will be borne by the low-margin L6 model.

If the gross profit margin of the L6 model is only 15%, and with the overall price reduction of 4-6% for the L7, 8, and 9 models starting in April, the overall gross profit margin for vehicle sales may stabilize at around 16-17%. However, market expectations for gross profit margin may still be around 18-19%.

Overall, if the gross profit margin for vehicle sales slips to around 17% (the conference call will need to pay particular attention to any quantitative or qualitative guidance on gross profit margin expectations), and with this year's relatively fixed research and development expenses, even if marketing/administrative expenses begin to tighten, the expected operating profit margin for this year will still need to be revised downwards.

In other words, after this performance, market expectations need to be adjusted downwards, and Li Auto's stock price may need to continue to decline. Once it reaches an appropriate level of decline, then the discussion of Li Auto's safety margin can be considered.

Detailed Analysis Below:

Since Li Auto's sales volume has already been announced, the most important marginal information lies in: 1. First-quarter gross profit margin; 2. Second-quarter performance outlook for 2024.

1. Vehicle sales business gross profit margin at 19.3%, lower than the market's expected 20.2%

In the first quarter, Li Auto's vehicle sales business gross profit margin was 19.3%, a decrease of 3.4% compared to the 22.7% in the fourth quarter of last year, and lower than the market's consensus expectation of 20.2% and Li Auto's previous performance guidance of 20%.

However, due to an accounting adjustment of 400-500 million in warranty reserves in the fourth quarter of last year (previously over-provided, now adjusted back), the actual gross profit margin for vehicle sales in the fourth quarter of last year was between 21.5% and 21.7%. The gross profit margin for vehicle sales in the first quarter actually decreased by 2.2%-2.4% compared to the fourth quarter of last year.

(Note: The car sales gross profit margin data for the third quarter of 22 excludes 800 million yuan + the impact of contract losses, and the car sales gross profit margin data for the fourth quarter of 23 excludes 400 million yuan in warranty deposits)

From the perspective of per car economics:

1. Intense competition led to a decrease in per car price by 0.4 thousand

The average price per car in the first quarter was 302,000 yuan, with each car selling 0.4 thousand less than the previous quarter. This was basically in line with the per car price estimated by Dolphin Jun in the first quarter guidance issued by Li Auto at 302,000 yuan.

Due to the model upgrade by Li Auto (the L series will introduce a facelift in March 24), prices for the 23 models were reduced by 33,000 to 38,000 yuan in January, dragging down the per car price in the first quarter. Although the higher-priced mega was also delivered in March, it only accounted for 4% of the first quarter sales volume. As a result, the per car average price in the last quarter decreased by 0.4 thousand compared to the previous quarter.

2. Decrease in sales volume led to a per car cost increase of 0.35 thousand

The per car cost for Li Auto in the first quarter was 243,000 yuan, which increased by 0.3 thousand compared to the actual per car cost of 240,000 yuan after excluding the impact of warranty deposits from the previous quarter.

This quarter, due to the off-season for car sales + intensified competition, car sales volume decreased by 39%, leading to a decrease in capacity utilization rate and an increase in per car amortized cost. With lithium carbonate prices stabilizing in the first quarter and limited contribution to costs this year, the per car cost increased by 0.35 thousand compared to the previous quarter.

3. Finally, per car gross profit was 58,000 yuan

In terms of per car profitability, Li Auto made a gross profit of 58,000 yuan per car in the first quarter, which decreased by 8,000 yuan compared to the previous quarter. The overall gross profit margin for car sales decreased from the actual 21.7% in the fourth quarter of last year to 19.3% in the first quarter.

II. Sales guidance for the second quarter of 24 meets expectations, but the implied unit price decline in revenue guidance is significant!

a) Second quarter 24 car sales target: 105,000-110,000, basically in line with market expectations

In the first quarter, Li Auto's sales performance was sluggish due to the off-season for car sales + intensified market competition, with sales declining by 30% to 80,000 vehicles. Li Auto quickly adjusted its strategy thereafter and reduced prices for all models on April 22 by varying amounts ranging from 18,000 to 30,000 yuan.

The market is most concerned about whether orders for Li Auto models after the price reduction can effectively recover. With the contribution of 2,790 units delivered on the market launch of L6 last week + the impact of across-the-board price reductions, weekly sales have recovered to nearly 8,000 units.

Li Auto's delivery guidance for the second quarter is 105,000-110,000, representing a 31-37% increase compared to the first quarter delivery of 80,000 units. With known deliveries of 25,800 units in April, it implies that the average delivery volume for May and June will reach 40,000-42,000 units, which is basically in line with the market's expectation of 100,000-110,000 units and also indicates the need for rapid scaling up for L6 in the face of the failure of mega

b) Implied Unit Price Guidance Indicates a Decrease of Nearly 30,000 Yuan!

Compared to the delivery volume guidance, what the market is most concerned about is the impact of the gross profit margin in the second quarter after the price reduction across the board in April. However, the implied unit price expectation for this quarter's revenue forecast shows a significant decline!

Ideal's first-quarter revenue for 2024 is projected to be between 29.9 billion and 31.4 billion. With an estimated contribution of 1.4 billion from other revenues, the implied unit price for the first quarter of 2024 is around 272,000 yuan, which is close to a further decrease of nearly 30,000 yuan compared to this quarter!

The significant decrease in unit price is mainly due to Ideal's price reduction for all models on April 22nd, with price cuts ranging from 18,000 to 30,000 yuan, representing a reduction of around 4% to 6%.

The 30,000 yuan decrease in unit price expectation is also influenced by the vehicle structure. The low-priced, low-margin L6 model launched in April will account for a significant proportion in the second quarter's vehicle structure, leading to a further decline in unit price. The failure of the high-priced, high-margin Mega model, with sales dropping to only 147 units from May 6th to May 12th, contributes very little to the vehicle structure and does not drive the unit price up.

With a unit price of 270,000 yuan, the implied gross profit margin for the second quarter is a potential "hidden thunder," as the market's expectation for the gross profit margin in the second quarter is only around 18% to 19%, failing to fully anticipate the magnitude of the unit price decline.

IV. R&D and Sales Expenses Remain Firm

1) R&D Expenses: Continuously Firm, Investment Pace Not Adjusted in the First Quarter

This quarter, Ideal's R&D expenses amount to 3.05 billion, a decrease of only 450 million compared to the previous quarter, remaining firm and exceeding the market's expectation of 2.56 billion.

From the 3.05 billion R&D expenses in this quarter, it can be seen that Ideal has not yet adjusted its resource allocation in R&D, still following the original plan to invest in the target of 650,000 to 800,000 vehicles for the whole year. Looking at the seasonal changes in R&D expenses from the same period last year, 30 billion is actually a normal data without adjusting the investment pace.

Ideal still needs funds for R&D investment this year to develop a pure electric platform and three unreleased pure electric models. Although there have been layoffs (reducing the number of the intelligent driving team to less than 1,000 people), the investment in pure electric models is expected to remain firm this year

2) Sales and Administrative Expenses: Accelerated Channel Expansion in the Fourth Quarter of Last Year + Rigidity in New Model Promotion in the First Quarter

This quarter, sales and administrative expenses were 2.98 billion, a decrease of only 300 million from the previous quarter when sales were booming, significantly exceeding the market's expected 21.7 billion.

In terms of sales and administrative expenses, the company launched a large number of Mega and L series 2024 new models in the first quarter. Although the number of stores added in the first quarter was not significant (only 7 new stores), the peak of new store additions was actually in December of last year (adding 106 stores). This means that the first quarter will fully include sales expenses, and with poor sales volume, there was no time to adjust the pace of sales expense investment in the first quarter. As a result, the market directly underestimated by 1 billion RMB in this aspect.

Fortunately, Li Auto has started to adjust the investment on the Opex side, slowing down the pace of store openings on the sales side. At the same time, a new round of layoffs of 6,500 people was announced, with a layoff rate exceeding 18%. Sales and service personnel at Li Auto are the focus of the layoffs (nearly 12,000 people by the end of 2023), and it is expected that sales and service expenses will be effectively reduced in the following year.

V. Revenue and Gross Margin Both Below Market Expectations

With sales volume already announced, Li Auto's total revenue in the first quarter was 25.6 billion, an increase of 136% year-on-year, a decrease of 39% from the previous quarter, below the market's expected 26 billion.

The lower-than-expected revenue is mainly due to the fact that the unit price of cars in the automotive business is lower than market expectations, while other businesses (insurance, used cars, etc.) remained basically flat compared to the previous quarter, contributing revenue of 1.38 billion this quarter, exceeding the market's expected 960 million.

The lower-than-expected gross margin this quarter is mainly due to the decrease in the gross margin of the automotive business compared to the previous quarter, with the gross margin in the last quarter at 20.6%, lower than the market's expected 21.1%.

VI. Misalignment in Opex Investment Leads to Negative Operating Profit!

Li Auto's operating profit, which is relatively significant, turned negative in the first quarter! The absolute value decreased by 3.2 billion from 26 billion in the fourth quarter of last year to -6 billion this quarter, and the operating profit margin decreased from 6.3% in the fourth quarter of last year to -2.3% in the first quarter, significantly lower than the market's expected 4%! At the core, the main reason for the negative turnaround in operating profit for the first time since 2023 is mainly due to the misalignment of operating expense investment, with the investment pace still preparing according to the original sales target, resulting in a nearly 1.5 billion gap from market expectations.

The net profit for this quarter remains positive mainly due to the contribution of nearly 1.1 billion interest income, with a net profit of 600 million, adjusted net profit of 1.3 billion after SBC.

Inventory issues are severe this quarter, further impacting cash flow.

Due to the significant increase in inventory, reaching a historical high, from 68.7 billion at the end of last year to 121.6 billion this quarter, it directly led to negative operating cash flow, down by 20.6 billion compared to the previous quarter to -3.3 billion this quarter.

The substantial increase in inventory this quarter is mainly due to Ideal's overly optimistic sales expectations, with inventory levels almost doubling. The current 121 billion in inventory estimated by Dolphin is roughly equivalent to sales volume for about a month. If Ideal's sales do not meet expectations after price reductions, there will continue to be a risk of inventory impairment, further negatively impacting profit margins.

For historical articles by Dolphin, please refer to:

• Ideal's press conference on March 4, 2024: "Ideal Press Conference: Enhancing Product Power, Firmly Refusing to Lower Prices, and Testing the Waters with Pure Electric Vehicles"
• Financial report review on February 26, 2024: "Ideal: Not Being a 'Big Mouth', Just Working Hard"
• Summary of the phone meeting on February 27, 2024: "No Models Below 200,000 RMB in the Next 5 Years"2023 年 11 月 9 日财报点评"New Forces vs. Old Players, Can Li Auto Compete with Huawei?"

2023 年 11 月 9 日电话会纪要"Making Autonomous Driving the Core Goal (Li Auto 3Q23 Conference Call Minutes)"

2023 年 8 月 8 日财报点评"Peeling Back the Layers of Li Auto: Is the 'Ideal' Behind the 'Explosion' Really That 'Ideal'?"

2023 年 8 月 8 日电话会纪要"Li Auto Minutes: Production Capacity Bottleneck in Components, Gross Margin Guidance Maintained at 20%+"

2023 年 5 月 10 日财报点评"Li Auto: Leading in Performance, New Forces Leader Nails It"

2023 年 5 月 10 日电话会纪要"Li Auto Minutes: Leading in Market Share, Gross Margin Target of 20%+ Unchanged"

2023 年 2 月 27 日财报点评"Is Li Auto as Strong as a Tiger? Competition as Steady as a Dog"Minutes of the telephone conference on February 27, 2023: "Li Auto: 'Capture 20% Market Share of the 300,000-500,000 Luxury SUV Market in 2023'"

Financial report review on December 9, 2022: "Li Auto's Profit Plunge? Not Fatal, but Quite Awkward"

Minutes of the telephone conference on December 9, 2022: "In 2023, Li Auto Aims for a 'Billion' Ideal, a Purely Electric Vehicle"

Financial report review on August 16, 2022: "Li Auto Makes a Thunderous Sound, L9 Can't Support the 'Collapsed Ideal'"

Minutes of the telephone conference on August 16, 2022: "Li Auto ONE Eaten by L9, L8 to be Sold Early (Meeting Minutes)"

Product launch summary on June 22, 2022: "L9, Li Auto's New 'Ideal'"

Minutes of the meeting on May 10, 2022: "Li Auto: Three New Products to be Launched in 2023, Welcoming a Strong Product Cycle Year"

Financial report review on May 10, 2022: "Li Auto's Ideal, All Hopes Rest on the Second Half of the Year?"

Minutes of the meeting on February 26, 2022: "Completing the 0-1 Validation Period, Witnessing How Li Auto Achieves Growth from 1-10 (Meeting Minutes)"

Live performance briefing on February 25, 2022: "Li Auto (LI.US) First Quarter 2021 Performance Conference Call"On February 25, 2022, financial report review "Fulfilling the 'Cash' Ability, Li Xiang's Ideal Comes into Reality"

On November 30, 2021, meeting minutes "Launching Pure Electric Models before and after Xiaomi, How Does Li Auto Compete? (Meeting Minutes)"

On November 29, 2021, earnings conference live broadcast "Li Auto (LI.US) 2021 Third Quarter Earnings Call"

On November 29, 2021, financial report review "Outperforming Xiaopeng and Nio in Making Money, Is Li Auto Speculative or Long-term?"

On August 31, 2021, meeting minutes "Li Auto: Outperforming Nio and Xiaopeng in the Third Quarter, Aiming for 150,000 Vehicles Next Year (Meeting Minutes)"

On August 30, 2021, earnings conference live broadcast "Li Auto (LI.US) 2021 Second Quarter Earnings Call"

On August 30, 2021, financial report review "Li Auto: Steady Performance, Strong Momentum?"

On June 30, 2021, Three Idiots Comparative Study - Part II "New Forces in Car Making (Part II): Doubling in Fifty Days, Can Three Idiots Continue to Run Wild"

On June 23, 2021, Three Idiots Comparative Study - Part I "New Forces in Car Making (Part I): Market Enthusiasm Declining, How Can Three Idiots Consolidate Their Position?"

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

Risk disclosure and statement of this article: Dolphin Research Disclaimer and General Disclosure