In 2Q25, Li Auto’s total revenue advanced by 16.7% QoQ to RMB30.2bn, largely in line, while non-GAAP net profit surged 43.8% QoQ to RMB1.46bn, above anticipation thanks to resilient vehicle margin and disciplined OPEX controls. For 3Q25, despite the weaker delivery guidance of 90-95k units, management guided that blended gross margin will broadly stay on par with that in 2Q25 at 19%-20%. In addition, management indicated that at present, the company’s first priority is to restore delivery scale back to normal levels (ie. 50k units), which we deem mainly rely on the upcoming launch of i6 during peak season. We revise down volume forecasts for 2025-26 to 450k-650k units. Currently, Li Auto’s ADRs are trading at 1.4x 2025E P/S, between NIO (1.3x) and XPeng (1.8x), but we deem its abundant net cash position (c.RMB98.7bn as of 2Q25) could provide valuation supports at some level. Hence maintain BUY but pare down TP for ADR/H-share to US$32.00/HK$128.00, based on 2x 2025E P/S.
　　Key Factors for Rating
　　Revenue broadly in line while vehicle margin slightly beat on stronger cost reduction initiatives. 2Q25 total revenue advanced by 16.7% QoQ to RMB30.2bn, aligning with our estimate with the limited-time end-user incentives offered during May and June leading to a modest QoQ pullback in vehicle ASP by RMB5k to RMB260k. Meanwhile, vehicle gross margin and blended margin saw a slight QoQ decline of 0.3/0.5ppt to 19.4%/20.1%, exceeding our expectations by virtue of effective supply chain cost reduction initiatives.
　　Non-GAAP net income well above anticipation on resilient GPM and disciplined OPEX controls. 2Q25 R&D ratio decreased by 0.4ppt QoQ to 9.3%, primarily due to a slower pace of new model launches. Similarly, SG&A ratio dropped by 0.8ppt QoQ to 9.0%. As a result, the overall OPEX ratio dipped by 1.2ppts QoQ to 18.3%. Combined with resilient gross profit margin, 2Q25 non-GAAP net profit surged 44% QoQ to RMB1.46bn, with core earnings per vehicle significantly recovering to RMB13k from 1Q25’s RMB11k.
　　Wider-than-anticipated free cash outflows caused by the payment cycle adjustment to comply with 60-day payment terms. In 2Q25, net operating cash outflow reached RMB3bn, a 78% spike compared to the RMB1.7bn outflow in prior quarter. This was primarily caused by the company’s deliberate payment cycle adjustment to comply with the government’s 60-day payment term (now reduced to 60 days compared to 3-4 months last year).
　　Looking ahead, the company anticipates an improvement for operating cash flow dynamics in 3Q25, with the potential to turn into a net free cash inflow in 4Q25 supported by delivery scale-up.
　　Weak 3Q25 guidance implies a QoQ decline in volume; the upcoming launch of i6 is key to restore monthly sales back to prior-year levels.
　　The company projects 3Q vehicle deliveries of 90,000 to 95,000 units, implying a 14%-17% QoQ decline and near-flat MoM growth in Aug/Sep. This guidance falls below our anticipation and market consensus, indicating underlying demand woes from weaker order intake for the newly launched pure-electric SUV i8, and demand softness for the legacy L-series models amid a highly competitive landscape. During the earnings call, management indicates that besides the mass delivery of i8, the upcoming launch of i6 in late September is near-term key focus, which may drive monthly sales back to levels of last period (50k units). n Softer-than-feared margin downside risk in 3Q25 helped by improved product mix. During the earnings call, management guided that blended gross margins for 3Q25 will broadly stay on par with that in 2Q25 at 19%-20%, surpassing our prior expectations. Despite headwinds such as shrinking delivery scale, extra fixed cost as early production ramp-up for i-series BEVs counts, and generic margin dilution from BEVs, we deem that improvements in product mix with higher proportion of high-margin models (e.g., MEGA Home) may offset these adverse factors.
　　Valuation
　　To reflect the weaker-than-expected volume guidance, we revise down our sales volume forecasts for 2025/26 to 450k/650k units. Accordingly, we trimmed our revenue forecasts by 6%/4% to RMB125.8bn/178.7bn.
　　The management has outlined a clear strategy to streamline SKUs and focus on high-volume, flagship products with an ambition that the large-scale refresh of EREVs next year will regain the market buzz seen during the release of Li ONE and Li L9. However, prior to the next wave of all-new EREVs starting from next year, we anticipate the demand pressures for current L-series EREVs may persist towards the end of lifecycle. On a positive note, the existing L-series EREVs still generate robust gross profits, providing sufficient buffer for the company to pull pricing levers in response to a rapidly-changing competition dynamics.
　　Following the mass delivery of the Li i8 SUV this month, the market’s focus will shift to i6’s September launch and the initial market acceptance, as investors assess whether it can fully address the company’s sales downturn momentum as the major volume contributor. Management aims to position i6 as the most competitive offering in the five-seat mid-size SUV market, with expectations that this model will drive monthly sales volumes in 4Q25 back to levels seen in the same period last year (50k+ units).
　　Currently, Li Auto’s ADRs are trading at 1.4x 2025E P/S, between NIO (1.3x) and XPeng (1.8x). We anticipate its share prices may continue to present great volatility given the near-term demand pressure may persist before the delivery ramp-up of Li i6 SUV in 4Q25 and large-scale refresh for existing EREVs in 2026.
　　Nonetheless, we deem its solid net cash position (c.RMB98.7bn as of 2Q25) could provide valuation supports at some level. Hence maintain BUY but pare down TP for ADR/H-share to US$32.00/HK$128.00, based on 2x 2025E P/S.