Li Auto (LI): UBS cuts Li Auto's target to US$17 but keeps Buy on cash strength and a potential margin recovery

Overview

UBS reviews Li Auto after a prolonged operating downturn and lowers its target price to US$17. The report argues that weaker near-term sales and profitability justify estimate cuts, but Li Auto's cash-rich balance sheet, prospective product-driven margin recovery and depressed valuation leave room for a gradual re-rating.

Core views

UBS lowers its price target for Li Auto from US$23.00 to US$17.00 as domestic-market weakness, fierce competition, inventory clearance and higher raw-material costs have extended the downturn beyond its prior expectations. The firm cuts its 2026-28 volume forecasts by about 15% and reduces gross-margin forecasts by an average 1.9 percentage points. It now expects a Rmb4.7bn net loss in 2026, compared with its previous forecast of Rmb1.1bn net profit; 2027 and 2028 net-profit forecasts fall from Rmb4.5bn and Rmb7.0bn to Rmb1.3bn and Rmb4.5bn, respectively. UBS characterizes H1 2026 as the likely profitability trough. The operating pressure is visible in unit economics. Li Auto's H1 2026 revenue per vehicle declined 10% year on year to Rmb235.7k, while cost of goods sold per vehicle rose 3% to Rmb217.2k. Gross profit per vehicle consequently fell 64% to Rmb18.5k, and operating loss per vehicle widened to Rmb32.3k. Nevertheless, UBS notes an August volume rebound of 32% year on year and points to the i6's sales performance: it says the model has outsold Xiaomi's Yu7 and Zeekr's 7x. The report views this as evidence of brand equity and customer loyalty, while also highlighting Li Auto's Mach M1 and Mach VLA capabilities as competitive strengths in autonomous driving and physical AI. UBS expects margins to improve as the model mix becomes richer, operating efficiency improves and new products gain traction. Management expects vehicle gross margin to return to a 15-20% range in Q4 2026, from below 10% in Q2; UBS separately cites a recovery to above 15% by Q4. The new L9 Li version represented more than 85% of L9 sales since launch, which UBS considers supportive of mix-led margin recovery. The report also identifies the H2 launches of MEGA and i9, alongside the i8/i6 product cycle, as potential contributors to future volume and profitability recovery. Its 2027 base case assumes 498,993 units of sales volume and a 15.0% vehicle gross margin. Balance-sheet strength is central to the thesis. UBS estimates Li Auto has around Rmb80bn of net cash, worth more than 90% of market capitalization, and notes that operating cash flow has turned positive. It believes this liquidity gives the company the ability to withstand a prolonged downturn, wait for the next profitability upcycle and potentially support shareholders through further repurchases. Management announced a US$1bn buyback program in late March and had completed 63% by late August. UBS notes US$12bn of cash and considers further buybacks theoretically possible if attractive investment opportunities do not emerge, particularly given management's historically prudent cash management and limited acquisition activity. The revised target uses a sum-of-the-parts approach that separates operating value from excess cash. UBS values the core automotive operation at US$9.3bn using the peer-average 0.45x 2027E EV/Sales multiple, then adds US$7.9bn of net cash excluding working-capital requirements to reach equity value of US$17.2bn and a US$17.00 target price. Its detailed derivation uses 2027E revenue of Rmb139,955m, a 2027E average selling price of Rmb266k and USDCNY of 6.8. UBS notes Li Auto trades at 0.20x and 0.16x 2026E and 2027E EV/Sales on consensus estimates, with enterprise value close to zero; it also cites approximately 0.1x 12-month EV/Sales, more than one standard deviation below its two-year average of 0.5x. In UBS's view, the low valuation already reflects substantial pessimism and creates scope for a re-rating if earnings and margins stabilize. UBS's scenarios illustrate the sensitivity to execution. Its upside case uses 549k 2027E sales volume, a 16.0% vehicle gross margin and 0.50x EV/Sales to derive US$19.00 per share. The base case uses 499k units, 15.0% gross margin and 0.45x EV/Sales for US$17.00; the downside case assumes 449k units, 14.5% margin and 0.10x EV/Sales for US$10.00. While the report retains Buy, its short-term quantitative review is more cautious: it assigns a downside skew to the next earnings result and identifies no catalyst over the coming three months.

Analysis framework

UBS first reassesses volumes, margins and earnings following weaker year-to-date sales and H1 inventory-clearance effects. It then evaluates product mix, unit economics, competitive positioning and financial flexibility before applying a sum-of-the-parts valuation that separates the core vehicle business from net cash. Scenario analysis links the target-price range to 2027 sales volume, vehicle gross margin and EV/Sales multiples.

Methodology notes

• Valuation methodsSOTP (Sum-of-the-Parts) Valuation

  Sum-of-the-parts valuation

  UBS values Li Auto's automotive operations using a peer-average 2027E EV/Sales multiple and separately adds net cash excluding working-capital requirements.

• Valuation methodsPS valuation

  EV/Sales multiple valuation

  The core auto business is valued at 0.45x 2027E EV/Sales, while the report compares Li Auto's current forward EV/Sales multiple with history and peers.

• Industry AnalysisVolume-price decomposition

  Volume, price and margin scenario analysis

  UBS links valuation outcomes to 2027 sales volume, average selling price, vehicle gross margin and valuation multiple assumptions.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Li Auto (LI.US)

  Primary covered company; UBS sees potential for an earnings and margin recovery after the expected H1 2026 trough.

  Strengths

  Around Rmb80bn of net cash, positive operating cash flow, i6 sales momentum, brand equity, autonomous-driving capabilities and potential buybacks.

  Weaknesses

  Muted volume growth, losses in H1 2026, inventory-clearance pressure and elevated raw-material costs.

  Comparison

  UBS notes the i6 is outselling Xiaomi's Yu7 and Zeekr's 7x; Li Auto's year-to-date share-price decline of 29% matched Nio's but was less severe than XPeng's 48% decline.

  Risks

  Weaker demand, rising battery-material costs, stronger-than-expected competition and reduced NEV subsidies.

• Nio

  Comparable EV peer used in relative-performance and valuation comparison.

  Comparison

  Nio's share price was down 29% year to date; UBS's comps table shows 2027E EV/Sales of 0.3x versus Li Auto's 0.1x.

• XPeng

  Comparable EV peer used in relative-performance and valuation comparison.

  Comparison

  XPeng's share price was down 48% year to date; UBS says Li Auto outperformed despite operating challenges.

Key data

• 12-month price targetUS$17.00Reduced from US$23.00.
• Current share priceUS$11.52As of 21 Sep 2026.
• 2026 net earnings forecastRmb(4.7)bnRevised from previous expected net profit of Rmb1.1bn.
• 2027/2028 net earnings forecastsRmb1.3bn / Rmb4.5bnReduced from Rmb4.5bn / Rmb7.0bn.
• Net cashAround Rmb80bnMore than 90% of market capitalization, according to UBS.
• Vehicle gross marginBelow 10% in Q2 2026; above 15% expected by Q4 2026Expected recovery is tied to product mix and operating efficiency.
• 2027E core auto valuationUS$9.3bnBased on a peer-average 0.45x 2027E EV/Sales multiple.
• Buyback program completion63%Of the US$1bn program announced in late March, completed by late August.

Impact & implications

UBS believes Li Auto's depressed valuation already captures much of the earnings downside from competition and weak sales. The firm sees a potential recovery in investor confidence if the company restores vehicle margins, improves product momentum and maintains financial discipline, while its large cash balance provides downside support and optionality for additional buybacks.

Risks

• Demand could be weaker than expected if economic deleveraging and a broader slowdown depress vehicle demand.
• Battery-supplier concentration could weaken Li Auto's bargaining power and raise exposure to cobalt and lithium costs.
• Competition could intensify beyond expectations, including from additional Tesla localization and EV launches by traditional OEMs.
• A faster-than-expected reduction in NEV subsidies could adversely affect Li Auto's financials.

What to watch

• Whether vehicle gross margin recovers above 15% by Q4 2026 as management expects.
• Sales momentum from the L9 Li version, MEGA, i8/i6 and i9 rollout.
• Progress toward the 2027E base-case volume assumption of about 499k units.
• Whether Li Auto completes its current US$1bn buyback program or announces further repurchases.
• Competitive intensity, inventory-clearance pressure and battery raw-material costs.