Li Auto Inc.'s third quarter earnings were in line with expectations despite facing competitive pressures that led to a slight underperformance in revenue, primarily due to increased promotional activities. The company reported a gross margin of 22.6%, which was in line with the previous quarter but slightly lower than expected.
The key catalyst highlighted in the report is Li Auto's upcoming flagship model, Mega. Despite its controversial design, it is seen as positive because it echoes the initial reception of Tesla's Cybertruck and could potentially reduce cannibalization from Li Auto's existing model, Li L9. Management guidance suggests a monthly sales target of 5,000 units for Mega, with expectations that it will exceed this target.
Mega is anticipated to have the highest margin among all models, although specific pricing details are not yet disclosed. This model is expected to contribute positively to the company's financial performance due to potential scale economies, battery price drops, and improved margins. As a result, Li Auto's FY24E sales forecast has been adjusted upwards by 0.01 million units, to 0.61 million units.
For FY24E, the company is projected to see a 61% increase in net profit on a year-over-year basis, largely due to the accelerated investment in research and development. However, the forecasted income has been reduced by 2% to account for the competitive pressure leading to a decrease in average selling prices. The gross margin is expected to remain resilient due to falling battery costs and increasing scale.
Despite these positive developments, the company's FY24E net profit prediction has been cut to 145 billion yuan, reflecting a net profit margin of 7.4%. The valuation and risk assessment maintain an 'buy' rating, but the target price has been lowered from 55.00 USD to 50.00 USD, based on the revised FY24E price-to-earnings ratio of 25 times (previously 22 times). Key risks include slower autonomous driving development, lower-than-expected sales or margins, and potential industry rating downgrades.
In summary, Li Auto's future growth is anticipated to be driven by the successful launch of the Mega model, despite initial concerns over its design, while managing the competitive landscape and optimizing operational efficiency.
