China EVs 1Q26 Preview: Losses Return Already Expected, 2Q Orders and New Model Ramp Key Verification Points

Overview

This report is Morgan Stanley's preview of 1Q26 earnings for Chinese EV new forces, covering companies such as Li Auto, NIO, and XPeng. The main thesis is: 1Q26 sequential sales decline, margin pressure, and expense investment cause major EV startup firms to return to losses again, but this result is basically already expected by the market; therefore investors pay more attention to 2Q sales guidance, order recovery, new car releases, and sustainability of margin improvement.

Core views

Core views include: First, major EV new forces may return to losses in 1Q26 after profitability in 4Q25; revenue and gross margin generally match market expectations, opex management is key to EPS differences. Second, Li Auto 1Q delivery approx. 95k units, revenue forecast Rmb22.8bn, vehicle gross margin possibly down to 5.5%, US-GAAP net loss approx. Rmb3bn, 2Q sales guidance possibly 105-110k units. Third, NIO 1Q delivery approx. 83.5k units, revenue forecast Rmb25.3bn, vehicle gross margin approx. 18.1%, US-GAAP net loss Rmb1.1-1.2bn, 2Q sales guidance possibly 110-115k units. Fourth, XPeng 1Q delivery approx. 63k units, revenue forecast Rmb12.6bn, vehicle gross margin approx. 12.4%, GAAP net loss approx. Rmb1.9bn, 2Q sales guidance possibly 105-110k units.

Analysis framework

The report uses company guidance, deliveries, revenue, vehicle gross margin, group gross margin, R&D and selling/admin expenses, operating loss, and net loss indicators for 1Q performance preview, and takes 2Q sales guidance, new model launches, orders, and customer traffic as subsequent verification variables. Valuation part uses probability-weighted DCF or probability-weighted valuation methods, combining bull/bear/base scenario weights, WACC, beta, and long-term growth rates.

Methodology notes

• Valuation MethodProbability-Weighted DCF

  Probability weighting of cash flows and valuations across different scenarios.

  Li Auto related valuation adopts 25%/50%/25% Bull/Base/Bear weights, key assumptions include WACC 15.9%, beta 2.1, long-term growth 3%.

• Valuation MethodProbability-Weighted Valuation

  Incorporates sales growth, break-even time, and competitive environment into scenario weights.

  NIO related valuation assumes long-term sales growth and expects net profit break-even by 2028; key assumptions include WACC 17.8%, beta 2.4, long-term growth rate 3.0%, scenario weights 25%/50%/25%.

• Valuation MethodProbability-Weighted DCF

  Uses non-vehicle business revaluation and macro/competition risks as sources of bull/bear scenarios.

  XPeng related valuation adopts 30%/50%/20% Bull/Base/Bear weights, key base assumptions include 3% terminal growth rate, 1.6x beta, and 12.8% WACC.

Asset mapping & comparison

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

• Li Auto Inc. (LI.O)

  Covered company, 1Q26 earnings preview target

  Strengths

  1Q delivery above guidance, 2Q expected 105-110k units, L9 sales recovery likely more obvious from June; DCF target price history latest approx. US$22, higher than US$17.57 current price.

  Weaknesses

  Vehicle gross margin expected to drop to 5.5%, L-series discount deepens and i6 sales share increase pressuring margin, US-GAAP net loss approx. Rmb3bn.

  Comparison

  Relative to NIO and XPeng, Li Auto 1Q delivery scale is higher, but margin pressure is more prominent in the sample.

  Risks

  Component bottleneck, new model launch delay, auto sales growth slowdown, cash flow and profitability pressure.

• NIO Inc. (NIO.N)

  Covered company, 1Q26 earnings preview target

  Strengths

  1Q delivery 83.5k units exceeds guidance upper bound, vehicle gross margin expected 18.1% and flat sequentially, 2Q expected 110-115k units, L80 and ES9 ramping up in May may push sequential recovery.

  Weaknesses

  1Q revenue expected sequential decline 27%, US-GAAP net loss Rmb1.1-1.2bn, expenses still high.

  Comparison

  NIO margin performance better than Li Auto and XPeng, but still faces scale fluctuation and expense pressure.

  Risks

  Sales weaker than expected, model launch or ramp worse than expected, operating efficiency improvement worse than expected, industry valuation under pressure.

• XPeng Inc. (XPEV.N)

  Covered company, 1Q26 earnings preview target

  Strengths

  2Q sales guidance expected 105-110k units, sequential growth 68-75%, benefiting from overseas sales, new Mona 03 and GX push; target price history latest US$34 significantly higher than US$15.83 current price.

  Weaknesses

  1Q delivery 63k units sequential decline 46%, vehicle gross margin expected to drop to 12.4%, R&D expenses up 40% YoY to Rmb2.8bn, GAAP net loss approx. Rmb1.9bn.

  Comparison

  XPeng 2Q sales elasticity highest among three companies, but 1Q scale decline and AI/new model R&D investment make short-term loss pressure obvious.

  Risks

  Mid-to-high end market competition intensifies, margin expansion worse than expected, cash flow pressure, industry sales growth slowdown.

Key data

• Li Auto 1Q26 Deliveries95k units, -13% QoQAbove 85-90k units company guidance.
• Li Auto 1Q26 Revenue ForecastRmb22.8bn, -21% QoQAbove Rmb20.4-21.6bn company guidance range.
• Li Auto 1Q26 Vehicle Gross Margin Forecast5.5%Sequential decrease of 11.3 percentage points, group gross margin approx. 6.6%.
• Li Auto 1Q26 Net Loss Forecastabout Rmb3bn US-GAAP net lossExpected to be broadly consistent with consensus estimate.
• NIO 1Q26 Deliveries83.5k units, -33% QoQAbove 80-83k units guidance upper bound.
• NIO 1Q26 Revenue ForecastRmb25.3bn, -27% QoQSlightly above Rmb24.5-25.2bn company guidance.
• NIO 1Q26 Vehicle Gross Margin Forecast18.1%Flat sequentially, group gross margin approx. 17.3%.
• NIO 1Q26 Net Loss ForecastRmb1.1-1.2bn US-GAAP net lossCompare to 4Q25 GAAP profit Rmb122mn.
• XPeng 1Q26 Deliveries63k units, -46% QoQMatches 61-66k units company guidance.
• XPeng 1Q26 Revenue ForecastRmb12.6bnCorresponds to Rmb12.2-13.3bn company guidance, implies mild sequential ASP expansion.
• XPeng 1Q26 Vehicle Gross Margin Forecast12.4%Sequential decrease of 0.6 percentage points, group gross margin approx. 19.9%.
• XPeng 1Q26 Net Loss ForecastRmb1.9bn GAAP net lossAssumes non-operating income stable.

Impact & implications

The report's judgment on investment implications is, 1Q loss itself may not be a major negative catalyst, as the market has already downgraded expectations; what truly affects stock price and consensus is 2Q sales guidance, order recovery speed, consumer feedback after flagship model launch, whether gross margins can recover, and whether expense investment continues to drag on operating leverage. If new models drive sales and margin improvement, valuation and EPS expectations may get support; if model launch delays, competition intensifies, or industry sales growth slows, it may suppress profit margins and valuation.

Risks

• New model launch or ramp delay.
• Delivery disturbance caused by component bottleneck.
• Industry sales growth slowdown pressing overall valuation.
• Intensified competition in mid-to-high-end segments.
• High R&D and selling/admin expense investment, operating leverage recovery slower than expected.
• Margin improvement worse than expected or price discounts expand.

What to watch

• Whether 2Q sales guidance reaches Li Auto 105-110k, NIO 110-115k, XPeng 105-110k expected range.
• May Day holiday and subsequent store traffic, order flow, and consumer feedback on flagship models.
• Launch, delivery, and ramp rhythm of models L80, ES9, L9, Mona 03, GX.
• Whether vehicle gross margin and group gross margin can recover in 2Q.
• Whether R&D expenses and SG&A expenses form positive operating leverage as sales recover.
• Whether Morgan Stanley subsequently adjusts target price, rating, or EPS consensus estimate.