Downgrade to HOLD. We think that Li Auto may lack positive catalysts in thenext few months, as it faces both sales and GPM challenges. Meanwhile, LiAuto has been undergoing a transformation to focus more on AI-relateddevices, which may take a while to monetize. We suggest investors watch itsnew-generation L-series next year closely and whether the current margin dentmay persist in 2H26E or even FY27E.
　　3Q25 earnings excluding one-off costs largely in line. Li Auto’s 3Q25revenue was about 2% higher than our prior forecast. GPM in 3Q25narrowed by 3.7ppts QoQ to 16.3%, dragged by one-off costs of aboutRMB1.1bn related to the Mega recall. 3Q25 GPM would have been 20.4%,or 1ppt higher than our prior forecast without the recall costs. Operatingloss without the recall costs of RMB76mn was in line with our projectedloss of RMB15mn. Li Auto posted a first net loss (RMB625mn) in the past12 quarters.
　　Lack of positive catalysts in the next few months. Although we stillbelieve Li Auto is an outstanding company which may make anothercomeback post the Mega launch incident, especially with the recentorganizational restructuring, we expect the automaker to face both salesvolume and GPM challenges in 4Q25 and 1Q26. Management guided aGPM of 16-17% for 4Q25 and even lower for 1Q26. That means its profitrecovery may only start after 1Q26. It may lack positive catalysts for shareprice before the new-generation L-series.
　　Margin dent may persist, which makes valuation unattractive. We areof the view that Li Auto’s margin declines in 4Q25-1Q26 may not be shortlived,as it may have to lower prices for the redesigned L-series to push forhigher sales volume amid stiffer competition in China, especially forEREVs. We project FY26E sales volume of 0.5mn units with GPM of17.0%. That would result in a net profit of RMB3.4bn in FY26E on ourestimates, which corresponds to 41x P/E based on the current share price.
　　Valuation/Key risks. We downgrade our ADS/H-share ratings to HOLDfrom Buy and cut our target prices from US$28/HK$109 to US$18/HK$70,which now corresponds to 40x FY26E P/E and 18x FY27E P/E. We believesuch valuation premium has already priced in Li Auto’s leadingtechnologies in autonomous driving. Key risks to our rating and target priceinclude higher or lower sales volume and GPM than we expect, as well asa sector re-rating or de-rating.