In 3Q25, Li Auto’s total revenue declined 9.5% QoQ, while operating results (ex-MEGA’s recall impacts) were close to breakeven, largely in line. But free cash flow deteriorated to a record outflow of RMB8.9bn in 3Q25. 4Q25 delivery guidance implies 35-39k/month run-rate, better than expected amid the broader demand slowdown as seen in NEV rivals caused by subsidy runout. However, 4Q25 vehicle margin is expected to slip by 3-4ppts (from 3Q’s adjusted margin) on aggressive L-series promotions and i6’s ramp-up. On the positive side, i6 monthly capacity is expected to reach 20k units early next year after completing the battery supplier switchover. In our view, the company’s strategic pivot towards next decade still takes time to translate into its product strength and financial results. At present, its shares are trading at 1.3x/1.0x 2025/26E P/S with net cash position making up over 60% of current market cap. Maintain BUY with lower TP of US$28/HK$110 (1.5x 2026E P/S). Key catalysts ahead lie in more concrete information on Lseries changeover after 1Q26.
Key Factors for Rating
Top-line slightly beat on elevated MEGA mix. 3Q25 revenue reached RMB27.36bn (-9.5% QoQ), ahead of sales volume decline (-16.1% QoQ), primarily attributable to the escalated MEGA mix (10% of deliveries vs. 3% in 2Q) and possible milder-than-anticipated terminal purchase incentives on Lseries EREVs. As a result, blended ASP improved 6.7% QoQ to RMB278k. Other sales grew 10.1% QoQ to RMB1.5bn, also better than our projection.
3Q25 vehicle margin excluding MEGA recall provision came in better than expected, but 4Q25 margin may be eroded by elevated incentives for L-series and i6 ramp. In 3Q25, vehicle margin unexpectedly fell 4ppts QoQ to 15.5%, dragged by an RMB1.1 bn one-off provision related to the MEGA recall recently. Excluding this item, adjusted vehicle margin improved QoQ to 19.8%, better than market feared, as the richer product mix (higher MEGA contribution) more than absorbed the adverse impact from lower delivery scale. For 4Q25, the mgmt. guided for 3-4ppts QoQ decline from the 3Q’s 19.8% adjusted base, eroded by a fresh round of large-scale promotions on L-series EREVs started in October and rising i6 mix which yields lower margins (below 15%) in early ramp phase versus brighter margin profile for i8 (15%+).
Adjusted profitability close to breakeven as forecasted. In 3Q25, OPEX stayed high at RMB5.7bn, pushing the OPEX ratio up 1.7ppts QoQ to 21%. Reported non-GAAP net income swung to a RMB360m loss in 3Q25, ending eleven consecutive quarters of profitability since the company turned profitable in late 2022. However, if adjusting for MEGA-related recall provision, the underlying operating result was essentially breakeven (modest operating loss), in line with original guidance and our forecast.
Record quarterly free cash outflow on volume contraction and deliberate efforts to shorten the supplier payment term. In 3Q25, operating cash flow recorded an outflow of RMB7.4bn, while elevated capex continued. As a result, free cash flow deteriorated to a record outflow of RMB8.9bn. The deterioration of cash flow was largely due to: i) sequential volume contraction that reduced operating cash inflow; and ii) deliberate efforts to shorten supplier payment terms.
4Q25 guidance implies sequential monthly ramp-up towards year-end whereas 1Q26 headwinds flagged. 4Q25 delivery guidance implies a clear Nov-Dec monthly ramp (35–39k run-rate vs. Oct’s 32k), which seems better than expected amid the broader demand slowdown as seen in NEV counterparts triggered by government trade-in subsidy runout. Nonetheless, the mgmt. cautioned that 1Q26 will still face demand pressure amid the subsidy policy uncertainty, seasonal demand pullback during CNY, and demand contraction during the L-series product transition cycle. On the positive side, i6 monthly capacity is expected to reach 20k units early next year after completing the battery supplier switchover, which we view as an upside surprise. Valuation
To reflect stiffer market competition and faster-than-expected demand erosion on the aging L-series EREVs, we nudge down 2025-26E deliveries to 405k/530k units. Accordingly, we revise down revenue forecasts by 10%-18% to RMB113.7 bn/RMB147.3bn, respectively. Incorporating notable gross margin dilution from elevated low-margin i6 mix and slightly higher OEPX, we slash 2025-26E non- GAAP net profits by 45%-46% to RMB3.2bn/5.2bn. We trim our target price to US$28/HK$110, equivalent to an unchanged 1.5x 2026E P/S.
During the earnings call, the mgmt. reiterated its ambition on fresh annual record volume in 2026 (surpass 2024’s 500k full-year sales) on refreshed EREV models (featured competitive electric features, homegrown chips and upgraded smart EV specs) and i6 BEV ramp post battery bottleneck removal.
Positively, CEO Li Xiang announced a decisive return to “start-up mode” for the next decade, abandoning the professional-manager system and redefining products as “embodied-intelligence robots” with heavy AI focus — a clear signal of strategic reset after recent missteps. That said, we believe translating this strategical pivot into tangible improvements in product competitiveness, volume trajectory, and fundamental performance still takes time.
Currently, its share are trading at 1.3x 2025E and 1.0x 2026E P/S, with net cash of RMB89.4bn at end of 3Q25 representing over 60% of market cap (c.RMB140bn) and providing a solid safety cushion. Hence, maintain BUY. Key catalysts ahead include more concrete information on L-series changeover after 1Q26.