Maintain BUY. Li Auto’s 1Q25 net profit was in line with our forecast, while its cost reduction efforts still exceeded our expectation. We believe such capabilities are to be the foundation for its FY25E earnings resilience, although we have lowered our full-year sales volume forecast. We are still more positive than the market about Li Auto’s upcoming BEVs, especially with the facelifted Mega being better received by customers.
　　1Q25 earnings in line on cost reduction. Li Auto’s 1Q25 revenue was1% lower than our prior projection, mainly due to other sales and services.
　　GPM in 1Q25 widened by 0.2ppts QoQ, or 1.3ppts higher than our forecast. We attribute such beat to Li Auto’s superb cost reduction efforts, as discount rose QoQ. R&D and SG&A expenses were largely in line with our prior estimates, which led to in-line operating profit and net profit.
　　Cost reduction as key to FY25E earnings growth. Although we havealready highlighted the importance of the cost control for Li Auto in FY25E in our last report, its cost reduction capabilities still exceeded our prior expectation in 1Q25. The company has lowered its FY25 R&D expense guidance to RMB11-12bn. We also cut our FY25E SG&A expenses forecast by 8% to RMB12.5bn.
　　Facelifted Mega may provide more confidence for the upcomingBEVs. Although no guidance was given for the i8’s sales volume, the company had a lesson learnt from the Mega: focus on customers’ needs.
　　New orders from the facelifted Mega significantly exceeded the company’s expectation, which could be a good sign for the upcoming i8 and i6. We cut our FY25E sales volume forecast by 8% to 0.58mn units, largely due to EREVs, which is still in line with the company’s broad guidance. We project FY26E sales volume to rise 24% YoY to 0.72mn units, aided by more BEVs.
Earnings/Valuation. We cut our FY25E revenue forecast by 7% but only trim our net profit estimates by 13% to RMB10.4bn, partially due to lowered operating expense assumption. We expect Li Auto’s cost reduction efforts to continue aiding profits in FY26E. We project FY26E net profit to rise 41% YoY to RMB14.6bn. We maintain our BUY rating and target price of US$33.00 (or HK$131), based on 17x our revised FY26E P/E (prior 20x FY25E). We roll over our valuation to FY26E with a lower target multiple to reflect higher uncertainties. Key risks to our rating and target price include lower sales and/or GPM than our expectation, as well as a sector de-rating.