Thanks to the swift adjustments in marketing tactics, we expect deliveries to recover nicely to 35k-40k units in May, but may still take time to return to 50k units. For 1Q24, we anticipate overall gross margin could hold steady at around 20%, but considering the lofty fixed OPEX, we expect net profit likely to be flattish YoY at RMB900m, while non-GAAP net profit could stay at RMB1.4bn-1.5bn in 1Q24 with negative free cash flow temporarily. Given the invisibility of subsequent delivery recovery pace and wider divergence among market expectations, we expect near-term valuation likely to show great fluctuation. Yet, over the long term, we still favour the company's distinct product philosophy, strategic positioning in premium market and swift response capability to tackle operational challenges. Maintain BUY and lower TP to US$45.00/HK$175.00 (25x 2024E P/E).
Key Factors for Rating
Recent order intake recovered nicely yet it may still take time to rewrite monthly deliveries record set last December. Following the tepid demand in March and April, Li Auto's order intake has rapidly recovered since late April. We expect deliveries in May to recover nicely to 35k-40k units from 26k units in April, yet it may still take time to repeat the monthly sales record of 50k units set last December.
We expect vehicle ASP to remain largely stable QoQ as the improving sales mix offset drags from escalating discounts on aging L series. In 1Q24, the company encountered weaker demand for L series during the product switchover stage and insufficient pricing practice for new launches (incl. 2024 L series and MEGA) amid stiffening competition dynamics and tepid macro environment. We expect the vehicle ASP likely to stay flattish QoQ in 1Q24 as a portion of 2024 new L series and high-priced MEGA could primarily offset the drags from escalating promotions on older L series, but on a YoY basis, we expect vehicle ASP likely to drop over 10% considering the widening end-user discounts since 2H23.
We anticipate blended gross margin could hold steady at 20%, but vehicle margin may be impacted by April cash refunds for prior deliveries of 2024 L series and MEGA. On 22 Apr, the company slashed MSRP for all lineups except newly launched L6 model, with the price of MEGA model having reduced by RMB30k and those of 2024 L series by RMB18k-20k.
Considering the company has delivered more than 10k units of MEGA and 2024 L series in March, which would negate vehicle gross profit by over RMB200m in 1Q23 under our estimates, we anticipate vehicle margin likely to be lower than expected at 19% or below, but overall gross margin may stay at c.20% considering the contribution from lucrative other sales business.
Operating profit and net profit shall be affected by lofty fixed OPEX.
Given the sharp mismatch of deliveries against management expectations and persistent OPEX spending, we expect OPEX ratio to see a temporary spike towards 19%-20%, vs. 18.6% in 1Q23 and 16.4% in 2023, potentially leading to substantial YoY decline of operating profit in 1Q24. But thanks to the contribution from interest income and other income, we expect net profit likely to be largely flattish YoY at RMB900m, while non-GAAP net profit could stay at RMB1.4bn-1.5bn in 1Q24.
Deteriorating working capital on sales volume plunge QoQ may temporarily lead to negative free cash flow. Deliveries in 1Q24 plummeted by nearly 40% from 4Q23, which led to mismatch of trade payables and receivables. Coupled with inventory build-up of up to c.20k units as of end-2023 based on the gap between production and sales volume in 1Q23, plus extra cash usage from hefty CAPEX outlay for Beijing plant's initial ramp-up and massive launches for new products, we expect the company's free cash flow to be temporarily negative in 1Q24. But since deliveries are set to recover from 2Q24, we anticipate cash flow likely to improve and return to positive in coming quarters.
Valuation Earnings Forecast and Valuation
In late March, the company revised down full-year sales target to 560k-640k units, which implies monthly deliveries have to recover to above 50k units for the rest of year. This looks a bit challenging, though we believe the company will spare no efforts to attain the target in coming quarters. Thus, we revise down our sales volume forecasts for 2024-25 to 530k/730k units, respectively.
Accordingly, we lower our revenue forecasts by 20%-21% to RMB155bn/210bn for 2024-25.
Accounting for larger sales proportion of affordable L6 model and lower utilisation rate caused by lower EREV delivery scale and postponed BEV push, we assume a lower vehicle margin for 2024-25 at below 20% level. At the operational level, we expect to see stricter control on OPEX spending in subsequent quarters, which would constitute the savings from lower R&D outlay and scrutinised sales network expansion, in spite of constant heavy investment on fast-charging network. All in all, we chop down our non-GAAP net profit forecasts for 2024-25 by 25%-30% to RMB13.7/17.3bn, respectively.
Currently, its ADRs are trading at 1.4x 2024E P/S and 15.7x 2024E P/E. Over the long term, we still favour the company's distinct product philosophy, strategic positioning in premium NEV segment, and swift response/execution capacity to tackle operational challenges. Maintain BUY but lower TP to US$45.00/HK$175.00 by adopting unchanged 25x 2024E P/E.
Yet, we anticipate greater volatility on its valuation in the near term given the invisibility of delivery recovery pace and wider divergence among market expectations. Thus, aside from 1Q24 results, we suggest investors focus on the durability of order intake and sales recovery from May onwards. In addition, since it may take time for the company to regain confidence from investors, we reckon any refreshed guidance on margin outlook and renewed BEV strategy would affect the sentiment.