Chinese EV Startups Expected to Return to Losses in 1Q26, with 2Q Sales Recovery as Key Test Point

Overview

This report is Morgan Stanley's preview of 1Q26 earnings for Chinese EV startups, covering Li Auto Inc., NIO Inc. and XPeng Inc. The core judgment is: influenced by sequential sales decline, operating deleveraging, and rising R&D spending, major companies may record losses again in 1Q26; since weak 1Q results have been fully anticipated by the market, investors pay more attention to whether 2Q operating recovery materializes, including holiday foot traffic, order momentum, sales guidance, and demand feedback after key models launch in late May.

Core views

The report believes revenue and gross margins may roughly align with market expectations, with expense management becoming the key variable for earnings elasticity. Li Auto 1Q deliveries were better than guidance but vehicle gross margin may fall significantly; NIO 1Q deliveries exceeded the upper end of guidance and vehicle gross margin is expected to remain at 18.1%; XPeng 1Q deliveries aligned with guidance, and 2Q could achieve strong sequential growth driven by overseas sales, new Mona 03 and GX. Overall, the 1Q loss itself is not a major surprise; the strength of 2Q orders and delivery recovery is the key factor for maintaining or upgrading consensus.

Analysis framework

The report uses company delivery volumes, revenue guidance, vehicle gross margin, group gross margin, R&D and SG&A expenses, operating loss and net loss as the main earnings preview framework, combined with 2Q volume guidance and new model ramp-up to judge short-term operating momentum. Valuation section uses probability-weighted DCF or probability-weighted valuation, setting bull, base, bear scenario weights respectively, using key assumptions such as WACC, beta and long-term growth rate.

Methodology notes

• Valuation methodsProbability-weighted DCF

  Target valuation obtained by assigning different weights to bull, base, and bear scenarios.

  NIO-related valuation assumptions include Bull/Base/Bear 25%/50%/25%, WACC 15.9%, beta 2.1, long-term growth 3%; XPeng-related valuation assumptions include WACC 17.8%, beta 2.4, long-term growth 3.0%, and profit break-even expected by 2028.

• Valuation methodsProbability-weighted Valuation

  Reflect macro environment, industry competition, and non-vehicle business revaluation potential through different scenario weights.

  Li Auto related disclosure shows Bull/Base/Bear 30%/50%/20%, key assumptions include 3% terminal growth rate, 1.6x beta and 12.8% WACC.

• earnings_previewDelivery Volume-Gross Margin-Expenses-Guidance Framework

  Derive short-term profit changes from sales volume, ASP, vehicle gross margin, group gross margin, R&D expenses, SG&A, and 2Q volume guidance.

  Report emphasizes 1Q revenue and gross margins roughly align with expectations, expense control is key swing factor, 2Q volume guidance and new model orders are focus for judging recovery.

Asset mapping & comparison

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

• Li Auto Inc. (LI.O; US.LI)

  One of key covered companies, Chinese EV startup and smart electric vehicle target.

  Strengths

  1Q deliveries 95k units higher than guidance; 2Q expected 105-110k units; Valuation assumption WACC 12.8% lower than NIO and XPeng disclosed assumptions; Coverage rating is Overweight.

  Weaknesses

  1Q Vehicle GPM expected to drop significantly by 11.3 percentage points to 5.5%, Group GPM approx. 6.6%; Expected US-GAAP net loss approx. Rmb3bn, operating loss approx. Rmb3.5bn.

  Comparison

  Compared to NIO and XPeng, Li Auto 1Q delivery volume largest, but gross margin decline pressure more prominent.

  Risks

  L-series sales ramp-up and gross margin improvement below expectations, component bottlenecks, automobile sales growth slowdown.

• NIO Inc. (NIO.N; US.NIO)

  One of key covered companies, Chinese high-end EV and ADR target.

  Strengths

  1Q deliveries 83.5k units exceed upper end of guidance; Vehicle gross margin expected 18.1% and flat sequentially; 2Q expected 110-115k units, driven by L80 and ES9 ramp-up.

  Weaknesses

  Expected 1Q switch from 4Q25 profit to US-GAAP net loss Rmb1.1-1.2bn; Expense side R&D and SG&A total still high.

  Comparison

  Compared to Li Auto, NIO 1Q vehicle gross margin more stable; Compared to XPeng, NIO 2Q sales guidance growth rate lower but absolute scale slightly higher.

  Risks

  New model launch, sales recovery and operating efficiency improvement below expectations; Industry competition or macro weakness affect valuation.

• XPeng Inc. (XPEV.N; US.XPEV)

  One of key covered companies, Chinese smart EV and ADR target.

  Strengths

  2Q sales guidance expected 105-110k units, sequential increase 68-75%; Overseas sales, new Mona 03 and GX provide growth momentum; Coverage rating is Overweight.

  Weaknesses

  1Q deliveries 63k units, sequential decrease 46%; R&D expenses expected up YoY by 40% to Rmb2.8bn, GAAP net loss approx. Rmb1.9bn.

  Comparison

  Compared to Li Auto and NIO, XPeng 2Q expected highest sequential growth rate, but 1Q scale decline and R&D investment pressure more obvious.

  Risks

  Sales weaker than expectations, operating efficiency improvement below expectations, automobile sales growth slowdown suppresses industry valuation.

Key data

• Li Auto 1Q26 Deliveries95k units, sequential decrease of 13%Exceeds company guidance of 85-90k units; Expected 1Q revenue Rmb22.8bn, above guidance range of Rmb20.4-21.6bn.
• Li Auto 1Q26 Profit ExpectationUS-GAAP net loss approx. Rmb3bnVehicle GPM expected to fall to 5.5%, Group GPM approx. 6.6%; GAAP operating loss approx. Rmb3.5bn.
• Li Auto 2Q26 Sales Guidance Expectation105-110k units, sequential increase of 10-16%Report expects L9 sales recovery to become more obvious starting June.
• NIO 1Q26 Deliveries83.5k units, sequential decrease of 33%Exceeds upper end of guidance of 80-83k units; Expected 1Q revenue Rmb25.3bn, slightly above guidance of Rmb24.5-25.2bn.
• NIO 1Q26 Profit ExpectationUS-GAAP net loss Rmb1.1-1.2bnVehicle gross margin expected at 18.1%, Group GPM approx. 17.3%; 4Q25 was Rmb122mn GAAP profit.
• NIO 2Q26 Sales Guidance Expectation110-115k units, sequential increase of 32-38%Driven by L80 mid-May and ES9 late-May ramp-up.
• XPeng 1Q26 Deliveries63k units, sequential decrease of 46%Matches company guidance of 61-66k units; Expected revenue Rmb12.6bn.
• XPeng 1Q26 Profit ExpectationGAAP net loss approx. Rmb1.9bnVehicle GPM expected at 12.4%, Group GPM approx. 19.9%; GAAP operating loss approx. Rmb2.2bn.
• XPeng 2Q26 Sales Guidance Expectation105-110k units, sequential increase of 68-75%Attributed to overseas sales, new Mona 03 and GX incremental push.
• Coverage Rating and PricesLI.O, NIO.N, XPEV.N all rated OverweightDisclosed prices on 2026-04-30 were respectively US$17.57, US$5.91, US$15.83.

Impact & implications

Short-term investment implication is that market has priced in weak 1Q26 earnings, stock price reaction will more likely be determined by 2Q volume guidance, order conversion, new model ramp-up and expense control. If holiday foot traffic and order momentum improve, and key model launches see smooth sales ramp-up, consensus estimates may remain stable or upgrade; if price discounts, cost inflation or weak demand persist, gross margin and operating loss pressure may continue, suppressing industry valuation.

Risks

• 2Q orders and holiday foot traffic recovery below expectations, leading to missed delivery guidance.
• New model L80, ES9, Mona 03, GX or other key model ramp-up slower than expectations.
• Price discount expansion, cost inflation or product mix changes suppress vehicle gross margin.
• R&D investment and SG&A expenses higher than expectations, weakening operating leverage improvement.
• Macro environment weakness or intensified industry competition lead to pressure on Chinese EV valuation.
• Supply chain disruptions such as component bottlenecks may impact deliveries and profitability.

What to watch

• May Day holiday and subsequent store foot traffic, order volume and order conversion rate.
• Whether Li Auto 2Q sales reach 105-110k units and L9 recovery pace.
• NIO L80, ES9 post-launch ramp-up speed and 2Q 110-115k units guidance fulfillment.
• XPeng overseas sales, new Mona 03 and GX incremental contribution to 2Q deliveries.
• Whether 1Q vehicle gross margin and group gross margin match report expectations.
• Whether R&D expenses and SG&A expenses show unexpected expansion or stronger expense control.