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In the first quarter of 2024, Li Auto's operating profit turned from profit to loss, with a net profit mainly supported by 1.069 billion yuan in interest income and 220 million yuan in other income. However, the net profit fell by 36.7% year-on-year and 89.7% quarter-on-quarter.

On the evening of May 20th, Li Auto released its financial report for the first quarter of 2024, marking the end of the company's consecutive four quarters of profitability in its main business.

Operating revenue: 25.6 billion yuan, a year-on-year increase of 36.4%, and a quarter-on-quarter decrease of 38.6%.

Gross profit: 5.3 billion yuan, a year-on-year increase of 38.0%, and a quarter-on-quarter decrease of 46.0%.

Gross margin: 20.6%, still higher than the industry average, but it declined quarter-on-quarter, from 20.4% in the first quarter of 2023 to 23.5% in the fourth quarter of 2023.

Operating loss: 585 million yuan, the first time it turned to a loss after four consecutive quarters of profit, with an operating profit of 405 million yuan in the first quarter of 2023 and an operating profit of 3.036 billion yuan in the fourth quarter of 2023.

Net profit: 591 million yuan, a year-on-year decrease of 36.7%, and a quarter-on-quarter decrease of 89.7%.

The decline in profit is the most important message conveyed by this financial report. Li Auto became the first Chinese new force car company to achieve full-year profitability in 2023, and its operational efficiency and cost control capabilities are key to its favor in the capital market. For the first time since 2023, the operating profit in this quarter showed a loss of nearly 600 million yuan.

After the financial report was announced, Li Auto's US stocks fell by 15% at one point, with a closing price of $21.71, down 12.78%. On May 21st, Li Auto's Hong Kong stock opened at HKD 85.25, significantly lower than the previous trading day's closing price of HKD 99.90. As of the time of writing, the lowest point during the trading day was HKD 80.15, with a drop of nearly 20%. However, Li Auto's market value still leads among Chinese new force car companies, with a market value of $23.035 billion, which is about twice that of NIO ($10.894 billion) and about three times that of XPeng ($7.823 billion).During the earnings call, Li Auto executives warned that "the second quarter will be the most challenging quarter for the company this year." At the same time, several pure electric SUVs originally planned to be launched this year have been postponed to 2025 to align with the construction progress of the company's supercharging network and store layout.

"I must admit that since the beginning of this year, we have been facing multiple challenges in both internal operations and external environment, and our performance in the first quarter has been below our expectations at the beginning of the year," said Li Xiang, CEO of Li Auto, during the earnings call.

This gap is mainly reflected in sales and profits. In 2023, Li Auto delivered 376,000 vehicles for the whole year, a year-on-year increase of 182.2%, of which 131,800 vehicles were delivered in the fourth quarter, a year-on-year increase of 184.6%, and the delivery in December exceeded 50,000 vehicles for the first time in a single month.

Against this backdrop, Li Auto set a sales target of 800,000 vehicles for 2024, with an estimated delivery of 100,000 to 103,000 vehicles in the first quarter of 2024, a year-on-year increase of 90.2% to 95.9%, and a single-month delivery exceeding 50,000 vehicles in March.

However, the actual situation is that Li Auto delivered a total of 80,400 vehicles in the first quarter of 2024, a year-on-year increase of 52.9%, which, although significantly exceeding the growth rate of about 25% for new energy vehicles priced above 200,000 yuan in China, is about 20,000 vehicles short of the expected target.

Data from the China Passenger Car Association shows that in the first quarter of 2024, Li Auto's monthly deliveries were 31,100, 20,300, and 29,000 vehicles, respectively. The launch of the MEGA not only failed to meet sales expectations but also led to a public opinion crisis for the brand due to styling issues, marking a turning point from offense to defense. This pure electric MPV was originally expected to have a steady monthly sales of more than 6,000 units, but the sales in the first delivery month after the launch in March were only 3,370 units, accounting for only 4% of the first quarter's sales, and the sales in April further declined to over 1,000 units.

Li Auto's extended-range main battlefield is also facing strong challenges. Official data shows that in the first quarter of 2024, the cumulative delivery of the Enovate brand was 85,842 vehicles, and the parent company Seres achieved a revenue of 26.561 billion yuan in the same period, both of which exceeded Li Auto. In addition, several newly launched hybrid SUV models from Geely, Chery, and Great Wall are also squeezing Li Auto's market space.

The decline in sales directly affects the growth rate of revenue. In the first quarter of 2024, Li Auto's revenue was 25.634 billion yuan, a year-on-year increase of 36.4%, with a significant slowdown, being the second-lowest growth rate since its listing, only higher than the 20.2% growth rate in the third quarter of 2022 when the Li ONE was replaced.

In addition to the total revenue, the average price of Li Auto's vehicles is also declining. In the first quarter of 2024, the average sales price per vehicle of Li Auto decreased from 348,500 yuan to 301,600 yuan, presenting an unfavorable situation of both quantity and price decline.

The decline in sales has the greatest impact on profits. When sales are poor, the fixed assets and labor costs invested in advance for expected sales are still at a high level, leading to a significant reduction in profits. The greater the deviation from expectations, the heavier the loss.In the first quarter of 2024, Li Auto's operating expenses were 5.9 billion yuan, a year-on-year increase of 71.4%, with R&D expenses at 3 billion yuan, a year-on-year increase of 64.6%, and sales, general, and administrative expenses at 3 billion yuan, a year-on-year increase of 81.0%, all significantly exceeding the growth rate of sales volume and revenue.

The increase in expenses outpaced the growth in revenue, and for the first time since 2023, Li Auto reported an operating loss of 585 million yuan. The company managed to maintain a positive net profit for the quarter, mainly due to 1.069 billion yuan in interest income and 220 million yuan in other income.

At the same time, the free cash flow turned negative. The operating cash outflow for the quarter was 3.3 billion yuan, with capital expenditures of 1.8 billion yuan, resulting in a free cash outflow of 5.1 billion yuan, a sequential decrease of 19.74 billion yuan. As of March 31, 2024, Li Auto's cash reserves were 98.9 billion yuan, a sequential decrease of 4.8 billion yuan.

Looking ahead to the second quarter of 2024, Li Auto has lowered its expectations. The estimated delivery volume for the quarter is 105,000 to 110,000 units, with a total revenue of 29.9 billion to 31.4 billion yuan. However, even with the lowered expectations, based on the April delivery of 25,787 units, Li Auto would need to deliver at least 40,000 units in both May and June, a figure that is more than 1.5 times the average monthly sales volume in the previous three months.

Slowing Down Pure Electric Strategy

Li Auto's current position in the extended-range market remains solid, and sales momentum is on the rise. During the earnings call, Li Xiang expressed optimism about the monthly sales in the coming months. The product pricing adjusted in April is very competitive and highly recognized by consumers. Currently, the weekly order volume for the three models L7, L8, and L9 is continuously increasing, and the company has no plans to reduce prices in the future.

In the overseas market, Li Auto's senior executive Zou Liangjun stated that this year the company plans to establish after-sales service systems in Central Asia and the Middle East, and begin to explore countries and regions outside Western Europe and North America, selecting suitable agents to expand the market. However, in light of the adjusted sales targets for this year, the company will focus on the domestic market.

Additionally, the management of Li Auto conveyed an important message: Li Auto will not release any pure electric products this year, and the next pure electric model will be postponed to the first half of next year.

Li Xiang mentioned the conditions that need to be improved: First, the charging network; a self-operated supercharging network is a necessary condition for mid-to-high-end pure electric models at this stage. It is only when the self-operated supercharging network reaches Tesla's level that it is the right time to launch the product to the market. Second, sales outlets; to support a new model to achieve over ten thousand monthly sales, approximately 500 to 600 new car display spaces need to be added nationwide, otherwise, there will be a problem of increased product quantity but no visibility to consumers, leading to no growth in sales.

As of the end of April 2024, Li Auto has 481 retail centers, with 13 new additions in the first four months of 2024; 361 after-sales centers, with 1 new addition in the first four months; and 387 supercharging stations, with 86 new additions. According to the original plan, by 2024, the number of retail centers will reach 800, and the number of supercharging stations will approach 3,000.However, due to underwhelming sales, the growth rate of retail stores will slow down, and the planning for supercharging stations has been reduced to building 2,000 supercharging stations and 10,000 supercharging piles by the end of 2024. As of May 19th, Li Auto has built 404 supercharging stations and 1,770 charging piles. To achieve the annual target, approximately 8 new stations and 40 piles need to be constructed daily over the next seven months.

Li Auto's CFO, Li Tie, stated during the financial report meeting that despite fluctuations in delivery volume in the first quarter, the company will continue to invest in R&D and sales service networks. Li Xiang once lamented to NIO's CEO, Li Bin, "It's not easy to promote high-end pure electric vehicles," and "If the energy replenishment network doesn't take off, it's really impossible to sell." In contrast, NIO has established 2,415 battery swap stations, 3,594 charging stations, and over 20,000 charging piles nationwide.

The greatest risk is the erosion of confidence. A recent former employee of Li Auto told us, "The company has a value statement to do the right thing, not the easy thing. But what I see now is that we have done too many easy things, and it's becoming increasingly difficult to do the right thing."

Li Auto, from top to bottom, understands that catching up in pure electric is the right thing to do, but the difficulty of catching up is growing. According to the Passenger Car Association data, in April 2024, pure electric vehicles accounted for 59% of new energy vehicle sales, plug-in hybrids 32%, and range-extended vehicles 9%. The market share of pure electric vehicles decreased by 13% year-on-year, indicating that competition in the pure electric market is more fierce than in hybrid and range-extended markets.

Xpeng and NIO's proprietary energy replenishment networks were primarily established using financing during a more relaxed financing environment. Li Xiang himself has publicly acknowledged that his financing capabilities are a weakness, and with the current financing environment, Li Auto's construction of a proprietary charging network largely depends on self-funding.

Li Auto's self-funding ability is also facing a severe threat. In addition to the popularity of direct competitors like the AITO brand, the number of plug-in hybrid SUV models has rapidly increased over the past year, with almost all brands launching new plug-in hybrid SUVs, totaling dozens of models, all of which are squeezing Li Auto's market space.

In the face of a severe situation, Li Auto has made two main adjustments: First, organizational restructuring and personnel optimization. Based on the average salary of 380,000 yuan for Li Auto's employees in 2023, this move could save about 2 billion yuan in cash expenditure, repairing cash flow to support the construction of proprietary charging networks. Second, slowing down the pure electric strategy and focusing on the home market above 200,000 yuan. This move aims to boost sales and enhance self-funding capabilities. It was revealed at the financial report meeting that after the adjustment in April, orders for the models on sale are steadily increasing.

However, the biggest risk Li Auto currently faces is the erosion of market confidence. A person from a competing brand of Li Auto believes that Li Auto's past achievements largely depended on component and technology sharing among different models, which allowed for the rapid launch of new cars with controllable costs. However, this has also led to a form of path dependency. The failure of the MEGA, as the first product to deviate from the previous path, is not only a failure of a single model but also shakes confidence in the effectiveness of Li Auto's pure electric strategy.