Li Auto’s Q1 Gross Margin Plunged to 7.9%, Losses Expanded; Maintains Market-Perform Rating

Overview

Bernstein’s report highlights that Li Auto’s Q1 2026 results were significantly impacted by product mix shifts, leading to a sharp margin contraction and wider losses. Despite near-term headwinds from slowing sales growth and margin pressure, the company’s strong balance sheet and accelerated international strategy provide medium-to-long-term value support. The firm reiterates a 'Market-Perform' rating, with a US$19 target for LI and HK$74 for 2015.HK.

Core views

Q1 results faced substantial pressure, with the core issue being margin compression from a shift toward lower-priced models. Revenue reached RMB 23 billion, down 11.4% YoY and 20.1% QoQ. Deliveries totaled 95,100 units, up just 2.5% YoY, while average selling price (ASP) fell to RMB 226,000, down 14.8% YoY. This reflects an unfavorable product mix shift: the low-priced i6 model’s contribution surged from 26% last quarter to 60%. Consequently, overall gross margin collapsed from 20.5% a year ago to 7.9%, with vehicle gross margin dropping to 6.1%. Although operating expenses were controlled at RMB 4.8 billion (20.8% of revenue), weak top-line and gross profit led to an operating loss of RMB 3.0 billion and a net loss of RMB 2.3 billion, resulting in a net margin of -9.9%. The near-term outlook remains challenging, but new product cycles offer hope. The company guides Q2 deliveries at 95,000–100,000 units, implying a 10%–14.5% YoY decline, suggesting seasonal softness in May–June. However, the newly launched L9 Livis has seen strong demand, with ~10,000 orders in two weeks—though supply constraints limit Q2 deliveries to ~9,000 units. The product pipeline will be further bolstered by the updated L8 in late June and the new all-electric SUV i9 later this year. Management expects Q2 gross margin to rebound to ~10% and reaffirms its full-year 2026 gross margin target of ~15%, supported by higher-margin models like L9 and i9, partially offset by BOM cost pressures from batteries and memory. International expansion is accelerating and represents a key medium-to-long-term growth driver. The company plans to officially launch its range-extended L-series in the Middle East and Central Asia in Q3 2026, followed by the all-electric i6 in Europe in H2. Additionally, the MEGA model will enter key ASEAN right-hand-drive markets like Hong Kong and Singapore by year-end—marking its first foray into such markets. The firm believes this locally tailored product strategy could unlock new growth momentum over the medium term.

Analysis framework

The firm employed a classic 'Volume-Price-Mix' decomposition framework to analyze automaker performance. First, by breaking down sales volume, ASP, and product mix, it identified the sharp rise in i6’s share—not cost overruns—as the primary driver of margin erosion. Second, combined with relatively fixed operating expenses (Opex), it demonstrated the negative operating leverage effect during revenue contraction, explaining the widening losses. Finally, for valuation, the firm blended relative valuation metrics (EV/Sales and P/E multiples) with balance sheet analysis, noting that despite near-term earnings damage, the company’s ~RMB 93 billion cash reserve versus a ~RMB 112 billion market cap provides significant downside protection, limiting stock price downside risk.

Methodology notes

• Industry/ Sector Analysis FrameworkVolume-Price-Mix Decomposition

  Decomposing revenue changes into volume, price, and product mix effects

  The report precisely attributes ASP decline to i6’s mix share rising from 26% to 60%, isolating the structural cause of margin compression and helping investors distinguish between weak demand versus strategic product mix adjustments causing short-term pain.

• Valuation MethodologyEV/EBITDA valuation

  Using enterprise value multiples for valuation

  Given the company’s near-term losses rendering P/E ineffective, the firm uses a hybrid approach combining EV/Sales (0.5x) and forward P/E (15x) to more objectively reflect asset value and recovery potential during the growth phase.

• Company Fundamentals & Financial FrameworkFree cash flow analysis

  Emphasizing cash reserves as valuation support

  The report specifically contrasts the company’s ~RMB 93 billion cash position against its ~RMB 112 billion market cap, highlighting strong liquidity as 'downside protection'—a critical safety-margin perspective when evaluating loss-making growth stocks.

Asset mapping & comparison

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

• Li Auto (2015.HK / LI)

  Subject Company

  Strengths

  Strong cash reserves (~RMB 93B), diversified product lineup (L-series + i-series), accelerating international expansion

  Weaknesses

  Near-term margin pressure, i6 dragging down ASP, unclear timeline to profitability

  Comparison

  Range-extended technology retains advantages in lower-tier markets vs. pure EV competitors; stronger in intelligence and branding vs. legacy automakers

  Risks

  i6 and future models underperforming sales expectations; international trade barriers hindering overseas expansion

Key data

• Q1 RevenueRMB 23 billionYoY -11.4%, QoQ -20.1%
• Q1 Deliveries95,100 unitsYoY +2.5%, QoQ -12.9%
• Average Selling Price (ASP)RMB 226,000YoY -14.8%, driven by higher i6 mix
• Overall Gross Margin7.9%Sharply down from 20.5% a year ago
• Vehicle Gross Margin6.1%Significantly down from 19.8% a year ago
• Net LossRMB 2.3 billionNet margin: -9.9%
• Cash Reserves~RMB 93 billionProvides downside support to market cap

Impact & implications

The report views Li Auto as currently navigating a painful product cycle transition. While the ramp-up of i6 sacrifices short-term margins, it helps maintain market share and cash flow scale. Investors should tolerate near-term earnings volatility and shift focus from pure profitability to a holistic assessment of 'delivery scale + cash flow health + international progress.' A strong balance sheet enables the company to weather current price wars and industry adjustments, and successful international execution will be the key catalyst to reframe its valuation narrative.

Risks

• Current and future models (especially the upcoming i6 launch in September) underperforming sales expectations
• Product quality issues and potential recall risks
• Delays or setbacks in future product and technology R&D
• Persistent BOM cost pressures from batteries, memory, and other raw materials

What to watch

• Actual sales performance of the i6 model following its September launch
• Production ramp-up and delivery progress of the L9 Livis
• Progress of international expansion in the Middle East, Central Asia, and Europe
• Whether Q2 gross margin rebounds as guided to ~10%