In 4Q25, Li Auto’s total revenue grew 5.2% QoQ to RMB28.8bn, slightly missed on a steeper blended ASP drop. Gross margin modestly recovered from 3Q25’s 16.3% to 17.8%, but if excluding the nonrecurring MEGA recall costs in 3Q25, 4Q25 vehicle margin dipped by 3ppts QoQ to 16.8%. 4Q25 operating loss narrowed to RMB443m while free cash flow turned positive but full year of 2025 witnessed the firstever annual deficit up to RMB12.8bn since 2020. Looking ahead, we believe 1Q26 profit outlook poses a sharp downside surprise, with vehicle margin guided to contract by over 10 ppts QoQ, due to L-series inventory clearances, purchase tax subsidies, and slower margin ramp-up for the i6 amid the cost inflation. We expect the earnings drag from L-series destocking may persist into 2Q26, before possible turning point in 2H26 driven by new model cycle of refreshed L-series and i9 BEV. By adopting 1.2x 2026E P/S, we cut our TP to US$22/HK$85. We anticipate earnings pressure in upcoming two quarters and uncertain prospects for new models may lead to heightened stock price volatility.
Key Factors for Rating
4Q25 results summary. In 4Q25, total revenue rose by 5.2% QoQ to RMB28.8 bn, slightly missing our prior estimates on a steeper QoQ drop (by ~RMB28k) in blended ASP to below RMB250k amid a massive i6 mix surge (26% in deliveries vs. nil in 3Q) and wider promotions for L-series EREVs (additional cash subsidy by RMB15-30k). 4Q25 gross margin modestly recovered from 3Q25’s 16.3% to 17.8%, but if excluding the disturbs of non-recurring MEGA recall costs in 3Q25 on an adjusted basis, vehicle margin dipped by 3ppts QoQ to 16.8% in 4Q25 as guided, pressured by sub-optimal i6 margins during early production ramp-up. Combined with disciplined cost management (R&D and SG&A largely steady at RMB3.0bn and RMB2.6bn), operating loss narrowed to RMB443m, flipping non- GAAP net profit to RMB261m gain from 3Q25’s RMB360m loss.
4Q25 free cash flow turned positive but full year of 2025 witnessed the first-ever annual deficit since 2020. Bolstered by scaled-up sales and enhanced working capital management, 4Q25 operating cash flow and free cash flow swung to net inflows of RMB3.5bn and RMB2.5bn, respectively, ending the previous three consecutive quarters of outflows. For the full-year 2025, free cash flow posted a RMB12.8bn outflow as the first annual deficit since 2020. While net cash reserves remained robust at RMB91.7bn as of year-end, the company's cash position decreased by over RMB12bn during the year.
1Q26 delivery guidance came largely in line, but vehicle margin guidance posed a downside surprise. 1Q26 delivery guidance implies March deliveries recovering to 31k-35k units, largely in line. But at the analyst callback, management hinted vehicle margin would sharply contract by 10+ppts from 4Q25, which seems far steeper than market expectations. Key drags primarily stem from aggressive L-series inventory clearances via RMB30k-45k cash incentives per unit during the product transition, which erode vehicle margins at least by 5-8ppts. Besides, purchase tax subsidies added another 4-5ppts. Furthermore, rising raw material costs also hampered the margin ramp-up for the i6 BEV model, which missed prior guidance and remained significantly below the 15% target vehicle margin. Given the sluggish vehicle margin and rigid OPEX outlay (RMB4-5bn), we project operating loss may reach RMB2-3bn in 1Q26.
2H26 profit recovery hinges on product cycle momentum. The company set a sales target for 2026 to achieve 20%+ YoY growth from 2025 volumes (equiv. to 488k units), softer than the management’s prior ambition to reclaim 2024 levels, as previously disclosed in the 3Q25 results briefing. During the conf. call, the mgmt. outlined a dense launch cadence of four key models— including refreshed EREV flagships L9 (set for official release in 2Q26), L7, and L6, plus the all-new premium i9 BEV (scheduled for launch closely following L9 launch). We anticipate limited margin rebound in 2Q26, constrained by lingering L-series clearance drags and the i8’s inability to scale rapidly enough for meaningful profit support, leaving loss narrowing dependent on inventory resolution pace. 2H26 could mark a turning point as the company ushers in a fresh product cycle that tests the company’s competitive edge and profitability restoration — potentially stabilising earnings if execution delivers on premium positioning and cost efficiencies.
Valuation
To incorporate a more conservative sales trajectory and intensifying competition, we lower our 2026-27 delivery forecasts to 485,000 units and 600,000 units, respectively. Accordingly, we nudged down 2026-27 revenue forecasts by 8%-10% to RMB132.8bn and RMB162.1bn. Factoring in the margin dilution from rising BEV penetration and heightened promotional discounts for L-series models clearance, we slashed non-GAAP net profit estimate for 2026 to RMB614m, while reducing 2027 profit forecast by 16% to RMB5.5bn.
By adopting a 1.2x 2026E P/S (representing a 20% discount to NIO's 1.5x target P/S multiples), we trim our TP for ADR/H-shares to US$22/HK$85. The lower P/S multiples we applied to Li Auto than NIO is primarily due to: i) the prolonged L-series inventory clearance dragging on performance ahead of major product refreshes starting from 2Q26; and ii) limited visibility on the i9 BEV’s sales outlook, given the tepid consumer reception for the high-end i8 and MEGA. These headwinds will definitely weaken near-term fundamentals and cloud the path to margin recovery, leading to stock price volatility.
That said, the company’s deep expertise in AI and embodied intelligence continues to build differentiated barriers. Complemented by robust operational execution and ample liquidity, we reckon the company remains well positioned to navigate industry headwinds over the medium to long term. Hence, we maintain BUY. Suggest monitoring new product launch in 2Q26 and initial market feedback, L-series inventory clearance progress, plus new business (i.e. humanoid robots) developments.