Following the sales underperformance in 1H25, Li Auto saw further demand contractions since July, with weekly volume falling to below 6k last week. This reflects heightened competitions, model fatigue, as well as rising wait-and-see sentiment alongside the BEV release. For 2Q25, despite the delivery miss, we expect the effective cost reduction benefits of the L-series likely to support vehicle margin at around 19%, aligning with prior guidance. However, we deem the increasing sales mix of lower-margin BEVs with higher BOM cost, coupled with recent pricing adjustments may dilute the blended vehicle margin from 3Q25. This may result in the downside risk to the earnings outlook for 2H25. To reflect softer-than-anticipated demand and margin compression from i-series BEVs, we nudge down our 2025-26E sales volume forecasts to 490k/680k units, and slash our non-GAAP net income to RMB6.2bn/10.1bn respectively. Given the near-term volatility in profitability outlook, we switch our valuation methodology back to P/S multiples. Revise down TP for ADR/H-share to US$34.00/HK$135.00 based on 2x 2025E P/S. Maintain BUY.
　　Key Factors for Rating
　　Weekly data indicates further demand contraction ahead of the start of BEV delivery. In 1H25, Li Auto’s sales trailed the broader market with market share in China’s NEV market shrinking by 2ppts from 2024 . In particular, in spite of a slight increase of market share in the price segment of RMB200-300k thanks to the contribution of L6, its market share in the price segment above RMB300k significantly dipped by 4.8ppts in 1H25. Recently, end- user demand shows further contraction with weekly sales falling from 8-9k to below 6k units in the prior week (28 Jul - 3 Aug). We reckon the deteriorated demand dynamics reflects heightened competitions, model fatigue for existing L-series EREVs, and escalated wait-and-see sentiment among L-series target audience before the debut of Li i8. Li i8, with adjusted pricing and simplified offerings, is scheduled to begin deliveries on 20 August. Yet, a pricing dilemma may exist with i-series BEVs and existing L-series models, due to their overlapping features and similar target markets. We reckon the dilemma is compounded by the need to boost the initial market perception of i-series BEVs and to defend the established market relevance for L-series EREVs.
　　Earnings downside risk to watch from BEV’s margin compression. Despite 2Q25 deliveries fell short of prior expectations, the effective cost reduction efforts in the L-series are expected to support 2Q25 vehicle margin at around 19%, aligning with previous guidance. However, the higher BOM cost for i8 resulted from larger battery pack and upgraded interior configurations, as well as the recent price adjustments are likely to bring a lower vehicle margin undercutting that of Li L8. This implies that the increased sales mix of i-series BEVs from 3Q25 may dilute near-term blended vehicle margin, leading to earnings downside risks in 2H25.
　　To revise down earnings forecasts in light of lower sales volume estimates and margin assumption. The sales contribution from BEVs is insignificant in 3Q25, due to the inadequate delivery of i8 (scheduled for initial delivery from 20 Aug) and i6 (expected to debut in Sep). Thus, we feel a bit difficult for the company to achieve QoQ sales volume growth in 3Q25, with a potential YoY setback exceeding 30%. For 4Q25, we reckon the extent of delivery recovery largely hinges on: i). market feedback and delivery pace of two BEVs, and ii). the demand dynamics for L-series EREVs fueled by seasonal demand surge and front-loaded purchase ahead of the phase-out of NEV vehicle purchase tax incentives in 2026. That said, we deem full-year sales target to maintaining flat YoY at c.500k units appears a bit challenging. Thus, we revise down our sales forecast for 2025 from 580k to 490k units, with 2026 sales volume projections adjusted from 765k to 680k. Accordingly, we nudge down revenue forecasts for 25-26E by 11%-16%. In light of margin compression from i-series BEVs, initial production ramp-up costs for new models and possible promotions amid stiff competition, we slash our non-GAAP net income by 37%- 47% to RMB6.2bn/10.1bn, respectively.
　　Valuation
　　Over the past five years, Li Auto has rapidly emerged as a leader in China’s premium NEV market, becoming one of the first NEV start-ups to achieve profitability. Frankly, Li ONE and Li L9 have been pivotal in establishing its luxury leadership, as the former pioneered the domestic EREV market innovatively appealing to family-oriented consumers, and the latter successfully captured the six-seater large SUV market with deluxe features to cater for buyers seeking comfort and spaciousness.
　　Though these models once effectively carved out and dominated niche segments, we acknowledge that at present, Li Auto has been facing mounting challenges from both intensified external competition and internal missteps. On one hand, rivals have successively followed Li Auto’s product strategy and offered lower-priced models with similar features to Li Auto’s signature luxury cabin configurations. On the other hand, the company seems lack of sense and agility to counter latecomers. For instance, the enhancements in 2025 L-series models look good but are not sufficient to beat rivals which introduce entirely new models with technological improvements and competitive pricing.
　　In our view, Li Auto’s product strategy missteps may partly stem from the company’s shifted focus on technological innovations and catch-up in AD techs, as well as its self-confidence which lead to its overlooking on potential competitors and evolving competitive landscape. Looking ahead, we believe Li Auto has to swiftly pivot its strategic focus to: i) demonstrate its ability to expand BEV reach, which is also its current top priority, and ii) maintain EREV market relevance with effective product iteration and minimal demand cannibalisation with BEVs.
　　In terms of valuation, we prefer to switch valuation methodology back to P/S multiples from P/E multiples given that: i) near-term volatility in its profitability outlook amid the product switchover and its strategic focus towards defending market relevance; and ii) most of its NEV counterparts use P/S multiples due to sustained losses.