Earnings Call Transcript - LI Q3 2025

Operator, Operator

Hello, ladies and gentlemen. Thank you for joining Li Auto's Third Quarter 2025 Earnings Conference Call. Today's conference call is being recorded. I will now hand it over to your host, Ms. Janet Chang, Investor Relations Director of Li Auto. Please go ahead, Janet.

Janet Chang, Investor Relations Director

Thank you, operator. Good evening, and good morning, everyone. Welcome to Li Auto's Third Quarter 2025 Earnings Conference Call. The company's financial and operating results were published in a press release earlier today and were posted on the company's IR website. On today's call, we will have our Chairman and CEO, Mr. Xiang Li; and our CFO, Mr. Johnny Tie Li, to begin with prepared remarks. Our President, Mr. Donghui Ma; and CTO, Mr. Yan Xie, will join for the Q&A discussion. Before we continue, please be reminded that today's discussion will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's actual results may be materially different from the views expressed today. Further information regarding risks and uncertainties is included in certain company filings with the U.S. Securities and Exchange Commission and the Stock Exchange of Hong Kong Limited. The company does not assume any obligation to update any forward-looking statements, except as required under applicable law. Please also note that Li Auto's earnings press release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. Please refer to Li Auto's disclosure documents on the IR section of our website, which contain a reconciliation of the unaudited non-GAAP measures to comparable GAAP measures. Our CEO will start his remarks in Chinese. There will be English translation after he finishes all his remarks. With that, I will now turn the call over to our CEO, Mr. Xiang Li. Please go ahead.

Xiang Li, CEO

Now it's time for Mr. Li's translation. The third quarter of 2025 marked the beginning of the second decade for Li Auto. We faced numerous challenges, including issues with the supply chain, product life cycle, public relations, and shifting policies. These factors have negatively affected our operations and delivery figures. However, I want to focus on our long-term vision for the next decade and the three critical choices we must make regarding organization, products, and technology. The first choice concerns our organizational structure. We are contemplating whether to adopt an entrepreneurial model or a professional management approach. In the first seven years of Li Auto, we operated as an entrepreneurial company. However, as we scaled up, especially around 2022, many suggested transitioning to a professional management model, as seen in long-established companies like Mercedes, BMW, as well as tech giants such as Microsoft and Apple, which have prospered under this model. Over the last three years, we attempted to become accustomed to the professional management structure, but we realized that the two models are fundamentally different, primarily in management and operating principles tailored to different growth stages and industry environments. A professional model can succeed but depends on three conditions: a stable industry and technology cycle, a leading enterprise position, and a lack of motivation from the founding team. If all these criteria are met, a professional management model can be ideal, as evidenced by growth in companies like Apple and Microsoft. However, the entrepreneurial model fits an entirely different scenario: industry and technology cycles are transforming, the industry is unstable, and the founding team remains actively involved and motivated. Given that AI is influencing many sectors and considering our company’s characteristics, we believe we are better suited for the entrepreneurial model. This model encompasses four key aspects. First, it emphasizes discussions over reports. In a fast-changing environment, meaningful conversations are vital for enhancing understanding and making bold decisions. Second, the focus should be on user value rather than mere short-term deliveries. Delivering what truly adds value for users is paramount. Third, efficiency must be the goal rather than simply consuming more resources. For instance, if we previously spent $10 on a task, achieving the same with $8 this year frees resources for long-term projects that might not produce immediate revenue. Finally, it’s critical to identify key issues rather than just creating informational imbalances. By fostering value, increasing efficiency, and addressing essential challenges, we can thrive in a competitive environment and consistently meet customer needs. In the past three years, my team and I have endeavored to transition to a professional management model, but it has resulted in us becoming less effective. Companies like NVIDIA and Tesla continue to thrive as entrepreneurial entities, making it clear that we should leverage our strengths too. With 27 years of entrepreneurial experience since 1998 without serving as a professional manager in a large corporation, I am passionate about products, cars, and AI. Given that I am personally invested in this work, why not focus on what I excel at to lead Li Auto? Thus, starting in Q4 this year, my founding team and I will revert to the entrepreneurial model to welcome a new era and face new technological challenges. This choice is foundational to everything. As we look to the next decade, a crucial question remains: how can we effectively address our customers' issues? What products should we develop? And where is technology headed? Regarding products, we must decide what we need to create for our users. Should we prioritize electric vehicles, smart devices, or embodied robots? Focusing only on electric vehicles traps us in a competition based on specifications like range and space. If we only concentrate on electric vehicles, we risk a narrow focus that could minimize the impact of our R&D investments. Alternatively, if we shift to smart devices, we need to consider if users even desire these experiences in their cars, especially when better options exist on mobile devices. The third possibility is transforming our vehicles into embodied AI or, simply put, robots. In essence, we must explore how to give our cars perception capabilities, intelligent models, and the hardware necessary for a stronger presence. Our aim is to create vehicles that can drive, park, charge, and ensure usability and safety for our consumers. The challenge of the coming decade will be to innovate vehicles that are both automated and proactive—this will significantly enhance our users' lives. Ultimately, we believe that only by selecting an embodied AI strategy can we offer services exclusive to such products. The next choice relates to technology, specifically our full-stack AI system, determining if we should pursue language-based or physically oriented tech. These paths necessitate varied system capabilities. Building a robust embodied AI requires a completely different setup than traditional models, and currently, there are no third-party suppliers providing this comprehensive system. Merely increasing the size of the model, akin to language models, yields minimal performance gains. However, approaching this from an embodied AI standpoint presents the potential for significant performance breakthroughs. We are confident in the potential of embodied AI technology and are poised for the next generation of products. This is only the beginning, and I am eager about the opportunities that await us. Thank you.

Tie Li, CFO

Thank you, Xiang. Hello, everyone. I will now walk you through some of our third quarter financials. Given time constraints, my remarks today will be limited to the financial highlights. All figures will be in RMB, unless otherwise stated. For further details, we encourage you to refer to our earnings press release. Total revenues in the third quarter were RMB 27.4 billion, a decrease of 36.2% year-over-year and 9.5% quarter-over-quarter. This included RMB 25.9 billion from vehicle sales, a decrease of 37.4% year-over-year and 10.4% quarter-over-quarter, mainly due to lower vehicle deliveries. The sequential decline was partially offset by a higher average selling price due to the different product mix. Cost of sales in the third quarter was RMB 22.9 billion, down 32% year-over-year and 5.3% quarter-over-quarter. Gross profit in the third quarter was RMB 4.5 billion, down 51.6% year-over-year and 26.3% quarter-over-quarter. Vehicle margin in the third quarter was 15.5% versus 20.9% in the same period last year and 19.4% in the prior quarter. The year-over-year decrease was mainly due to estimated Li MEGA recall costs and the higher per unit manufacturing cost from lower production volume. The sequential decline was primarily due to the same recall-related costs. Excluding such recall costs, vehicle margin would have been 19.8% in the third quarter. Gross margin in the third quarter was 16.3% versus 21.5% in the same period last year and 20.1% in the prior quarter. Excluding the aforementioned Li MEGA recall costs, gross margin would have been 20.4% in the third quarter. Operating expenses in the third quarter were RMB 5.6 billion, down 2.5% year-over-year and up 7.8% quarter-over-quarter. R&D expenses in the third quarter were RMB 3 billion, up 15% year-over-year and 5.8% quarter-over-quarter. The year-over-year increase was primarily due to the pace of new vehicle programs and increased investments in expanding our product portfolio and technology, along with expenses from product configuration adjustments. The sequential increase was mainly due to those same product configuration adjustment expenses. SG&A expenses in the third quarter were RMB 2.8 billion, down 17.6% year-over-year and up 1.9% quarter-over-quarter. The year-over-year decrease was primarily due to share-based compensation expenses recognized concerning the CEO's performance-based awards in the third quarter of last year. Loss from operations in the third quarter was RMB 1.2 billion versus RMB 3.4 billion income from operations in the same period last year and RMB 827 million income from operations in the prior quarter. Operating margin in the third quarter was negative 4.3% versus 8% in the same period last year and 2.7% in the prior quarter. The net loss in the third quarter was RMB 624.4 million versus RMB 2.8 billion net income in the same period last year and RMB 1.1 billion net income in the prior quarter. Diluted net loss per ADS attributable to our ordinary shareholders was RMB 0.62 in the third quarter versus diluted net earnings of RMB 2.66 in the same period last year and RMB 1.03 in the prior quarter. Turning to our balance sheet and cash flow, our cash position remains strong with a quarter-ended balance of RMB 98.9 billion. Net cash used in operating activities in the third quarter was RMB 7.4 billion versus RMB 11 billion provided in the same period last year and RMB 3 billion used in the prior quarter. Free cash flow was negative RMB 8.9 billion in the third quarter versus RMB 9.1 billion in the same period last year and negative RMB 3.8 billion in the prior quarter. Now for our business outlook. For the fourth quarter of 2025, the company expects deliveries to be between 100,000 and 110,000 vehicles, and quarterly total revenues to be between RMB 26.5 billion and RMB 29.2 billion. This business outlook reflects the company's current and preliminary view on its business situation and market conditions, which is subject to change. That concludes our prepared remarks. I will now turn the call over to the operator and start our Q&A session. Thank you.

Operator, Operator

Your first question comes from Yingbo Xu at CITIC.

Yingbo Xu, Analyst

I have two questions. The first question is regarding the company's return to entrepreneurship and its plan for the next decade. We know that research and development takes time, so for next year, what kind of technological or product advancements can we anticipate? Additionally, from an investor's standpoint, how long should we realistically expect to see significant technological or product progress in the future? My second question pertains to the transition from EREV to BEV. What challenges are we facing in this transition? Can you provide us with more detailed information or assurance about the BEV aspect, particularly regarding our preparations for effective technology reserves and supply chain readiness?

Xiang Li, CEO

On your first question about 2026, next year, we'll be launching our AI system based on our internally developed M100 chips. Once this system is integrated into the car, we'll start to see real value and changes in user experience. Unlike large language models that can do deep research or video generation, this embodied AI product will benefit our users in their everyday use at a very high frequency. Regarding the next ten years, instead of focusing on a list of features, if we can solve key issues in critical areas and improve performance in bottleneck points, we will start to see a series of changes that we previously could not imagine. For key in-house BEV-related technologies, we are focusing on three areas: electric drive, battery systems, and electronic control. Firstly, for the electric drive system, we are concentrating on efficiency and user experience. We have developed and outsourced the manufacturing of silicon carbide power chips and have established our own dedicated drive motor factory. Our electric drive technology covers all BEV and EREV models, ensuring a quiet and smooth driving experience while optimizing energy consumption and vehicle driving range. Secondly, in the battery system, our focus is on ultrafast charging and safety. We have built comprehensive in-house capabilities around 5C ultrafast charging batteries, including full control over self-chemistry, BMS control modules and algorithms, as well as battery pack layouts and structural design. On the supply side, we have a combined strategy of external sourcing and in-house development. Li Auto's 5C batteries will enter mass production next year, which will further enhance our battery safety and improve user experience. Finally, regarding the electronic control system, our aim is to deliver the best driving experience through our in-house developed hardware and software. On the software side, we have comprehensive in-house development capabilities for powertrain control, while on the hardware side, our core domain controller PCB layouts are all developed internally. By leveraging these three electric technologies, we are providing our users with a special fast-charging long-range, smooth, and safe driving experience.

Operator, Operator

Your next question comes from Tim Hsiao from Morgan Stanley.

Tim Hsiao, Analyst

So, I have two quick questions focusing on the near-term operation. The first one about the product, Li i Series. Could the management team share the latest update on orders and deliveries of Li i8 and i6? In the meantime, how and when could you start the current supply bottleneck of the Li i6 and i8? How should we think about the normalized sales volume of the two i Series models in the following months? My second question is about cash flow. Li Auto actually registered increasing operating cash outflow of about RMB 7.4 billion or free cash outflow of RMB 8.9 billion during this quarter. So, this caused quite a significant drop in the company's cash reserve drained away. Why is that? And how should we think about the cash flow in the following quarters?

Xiang Li, CEO

This year, we launched our battery electric vehicle portfolio with the i8 and i6 models, targeting both mainstream and premium segments of the family electric vehicle market. Our products are designed to support the dual energy strategy, combining extended range electric vehicles and battery electric vehicles, which together fulfill the varied requirements of our customers. Notably, we have made progress in key regional markets. The i-Series has entered major electric vehicle markets like Beijing, Shanghai, Jiangsu, and Zhejiang, with significant order growth in these regions beginning in September. The production of the Li i8 and i6 models is steadily improving, with increased production rates, faster deliveries, and stronger market presence. Starting in November, we will implement a dual supplier approach for our batteries for the Li i6 to tackle production ramp-up issues. We expect the monthly production capacity of the Li i6 to gradually rise to approximately 20,000 units early next year. We sincerely apologize to customers who have placed orders for the i6 and are still waiting for their deliveries due to supply chain challenges with key components affecting our schedule. We appreciate your trust in Li Auto and request your understanding and patience as our team works hard to boost production and speed up deliveries.

Tie Li, CFO

And for the second question, Tim, this is Johnny. The operating cash flow is attributed to two reasons. First, as we guided in the last earnings release, the third quarter faced great pressure on deliveries, leading to decreased revenue, which impacted our operating cash flow. Additionally, the shortening of the payment cycle to suppliers has contributed to this situation. Currently, the settlement period for all our accounts payable is 60 days, and payments are made through normal bank transfers without any business notes.

Operator, Operator

Your next question comes from Ming-Hsun Lee from BofA.

Ming-Hsun Lee, Analyst

So, my first question is that because next year, the trade-in subsidy policy will change, and also the EV purchase tax will increase from 0% to 5%. If the subsidy declines next year, what will be your sales strategy for 2026? My second question is that in 2026, your Li i and Li L series will have a new generation. What can we expect the most in terms of new features, specifications, and advantages for your new models?

Xiang Li, CEO

We believe this change signifies a shift in the auto industry from being driven by policy adoption to being fueled by organic market forces. This phase will highlight the strength of leading players. We anticipate a rush of customers aiming to secure their incentives at the end of 2025, which may lead to a decline in deliveries in the first quarter of 2026. Nonetheless, we are hopeful about the growing adoption rate of new energy vehicles (NEVs). We project that the NEV penetration rate in the domestic Chinese market will reach between 55% and 60% by 2026, with the premium segment surpassing 60%. Our approach will include ensuring user benefits during this transition. For orders made in 2025 but delivered in 2026, we will provide a program that covers the purchase tax difference for our i6 customers. All our models for 2026 will adhere to new standards to ensure they are eligible for incentives. In the long run, we plan to counterbalance policy changes through advancements in technology, incorporating an 800-volt high-voltage platform and 5C ultrafast batteries for improved efficiency. We also aim to have around 4,800 supercharging stations operational by 2026, focusing on significant localization of our supply chain and product updates to stay competitive. Our priorities will be on technological improvements, timely deliveries, and enhancing user value during this policy transition, reinforcing our position in the premium market. We will share more information about product launches at the right time, so please stay tuned.

Operator, Operator

Your next question comes from Paul Gong at UBS.

Paul Gong, Analyst

So, I have two questions. The first one is regarding the recall of the MEGA. I noticed this was announced in Q4. Why are you booking it in Q3? How did you determine the amount and the sharing between yourself and the supply chain? What's the impact on the Q4 GP margin? If possible, can you also update us about the latest situation of the callback of the recall, as well as the latest order of MEGA? My second question is regarding the AI. Can you provide an update on the latest development of VLA, large model, and the user feedback? If possible, please give more color on the future targets and upgrade process.

Tie Li, CFO

Paul, this is Johnny. We recognized this in Q3 because we regard this event as a subsequent event. So, it's accounted for in the most recent quarter in accordance with accounting standards. Currently, we have made the necessary changes to fulfill the recall requirements to serve our customers' interests.

Xiang Li, CEO

We rolled out our VLA Driver to all of our AD Max vehicles in September. With strong migration capabilities across all releases, all of our AD Max users now have access to this new model, including the latest i Series and Li L9 users. User feedback indicates improved effectiveness and a better experience. We have noticed that owners of the Li L Series and i Series are more willing to use VLA Driver, with both daily active users and monthly performance indicators showing improvements. Users generally find the VLA smoother, especially in longitudinal control, and more decisive in detours and route selection at intersections. The VLA continues to iterate to achieve further breakthroughs. OTA 8.1 will enhance perception capabilities, allowing for more precise and responsive behavior. By the end of the year, we will deploy an architecture upgrade compatible with the M100 chip, further improving decision-making processes.

Operator, Operator

Your next question comes from Tina Hou from GS.

Tina Hou, Analyst

Thanks management for taking my questions. I just have one question. What is the progress in terms of our in-house developed SoC as well as the operating system, and what progress have we made in terms of open source and future development?

Tie Li, CFO

We believe that the AI inference system is a core foundation for intelligent vehicles. For efficiency, the system must be designed with integrated architecture, not separate parts. Our in-house-designed controller hardware and operating system have significantly reduced development time while lowering costs. Many modules still originate from suppliers, but we are collaborating through open source with our partners across the intelligent vehicle value chain. We are conducting large-scale system testing of our M100 chip, which we expect to commercialize next year. We anticipate that the M100 will achieve at least 3x the performance-to-cost ratio compared to high-end chips available today.

Operator, Operator

Thank you. As we are now reaching the end of our conference call today, I would like to turn the call back over to the company for closing remarks. Ms. Janet Chang, please go ahead.

Janet Chang, Investor Relations Director

Thank you once again for joining us today. If you have further questions, please feel free to contact Li Auto's Investor Relations team. That's all for today. Thank you.