To The Moon

$Li Auto(LI)$ ’s 3Q25 results came in under pressure as deliveries dropped 39% YoY to 93,211 units due to supply-chain issues, product transition, and the MEGA recall. Revenue fell 36% YoY to RMB27.4bn, and gross margin slipped to 16.3%—or a more resilient 20.4% excluding recall impact. While near-term metrics were weak, the quarter also marked a strategic reset, with clearer signals around BEV momentum, product pipeline visibility, and the company’s long-term AI-driven roadmap. The team maintains a BUY rating but lowers the price target to $24 (from $28).

3Q results showed several underlying positives despite headline softness. Vehicle margin, adjusted for recall provisions, held up at 19.8%, reflecting stable cost structure even amid lower scale. R&D spending grew 15% YoY to RMB3.0bn as the company continued to invest in its M100 in-house SoC, full-stack autonomous driving, and next-gen AI platforms. SG&A declined YoY, providing some offset to top-line and margin headwinds.

A major update this quarter was CEO Xiang Li’s announcement that the company will adopt an entrepreneurial operating model starting in 4Q. We view this shift as an important step toward faster decision-making and tighter product-focus execution—particularly as Li Auto prepares for a multi-platform, high-density product cycle in 2026.

International expansion also began with the company’s first authorized overseas retail store in Uzbekistan, signaling management’s confidence in the scalability of its EREV and BEV strategies.

Management reiterated that Li Auto’s long-term vision is rooted in embodied intelligence—treating vehicles as autonomous, interactive agents rather than passive smart devices. This direction depends heavily on breakthroughs in perception, planning, drive-by-wire systems, and on-device computing, supported by the M100 chip and new VLA architecture. While early in execution, the integrated AI and hardware approach strengthens Li Auto’s competitive moat and sets the stage for higher-value intelligent services in future product cycles.

Looking ahead, 2026 remains the company’s focal point for a major overhaul of the L series, with simplified SKUs, full 5C/800V adoption, and stronger design improvements. Li Auto expects both EREV leadership and BEV penetration to rebound meaningfully next year, supported by its fast-growing charging network—now at 3,420 supercharging stations, with plans to reach 4,800 by 2026.

Despite the near-term softness from weaker deliveries, recall-related margin drag, and supply bottlenecks, the company’s strategic direction appears clearer. BEV volumes are gaining traction, underlying margin resilience is intact, and the management restructuring should strengthen execution into 2026. Combined with a solid balance sheet and continued investment in AI and charging infrastructure, Li Auto enters next year on a firmer footing.

Estimate revisions: 4Q revenue revised down 20%, and non-GAAP net income cut by 87%.

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