Li Auto, Inc. (LI, BUY) - 2Q26: Reset Largely Priced In; Recovery Ahead; Maintain BUY but Lower PT to $16

Li Auto, Inc. (LI, BUY) - 2Q26: Reset Largely Priced In; Recovery Ahead; Maintain BUY but Lower PT to $16 We maintain our BUY rating on Li Auto following 2Q26 results, while lowering our price target to $16 from $22 to reflect weaker near-term volume and margin expectations. Deliveries and revenue modestly exceeded our estimates, and margins improved sequentially, but gross margin remained depressed and higher SG&A drove a wider-than-expected loss. Management’s 3Q guidance also suggests another soft quarter before the new product cycle contributes more meaningfully. We believe much of this reset is reflected in the share price. LI trades at ~$12.30, roughly 55% below its 52-week high of $27.10. The L-series refresh is largely complete, the new L6 is ramping, and the refreshed i8, new MEGA and flagship i9 should broaden the lineup into 4Q. We expect deliveries, margins and earnings to improve, creating a more favorable risk/reward after the selloff. 2Q Improved Sequentially, but Profitability Remains Depressed. 2Q deliveries reached 98.3k units, 0.6% above our estimate, while revenue of RMB25.7bn was 1.9% ahead. ASP was also slightly better than expected at RMB245k. Vehicle gross margin recovered to 9.4% from 6.1%, and consolidated gross margin rose to 11.0% from 7.9%. The improvement was weaker than expected, however. Vehicle margin missed our estimate by 56bps and consolidated margin by 37bps, reflecting product-transition effects and higher battery, memory, PCB and semiconductor costs. SG&A of RMB2.28bn was 6% above our forecast due to increased marketing and promotions. Cash flow improved meaningfully: operating cash flow moved from negative RMB6.1bn in 1Q to roughly breakeven in 2Q, while FCF improved to negative RMB1.3bn from negative RMB7.4bn. With RMB87.5bn of cash and investments, LI remains well positioned to fund the transition. 3Q May Be the Last Soft Quarter Before Recovery. Management guided to 95k-100k deliveries and RMB26.6-28.0bn of revenue for 3Q. We model 98.5k deliveries and RMB26.9bn revenue, reflecting continued model-transition disruption. The key inflection should come in 4Q, when the refreshed lineup will have a full quarter of contribution. This could represent a meaningful step-up from the roughly 100k quarterly run-rate seen through much of 2026, without requiring a return to prior peak levels above 150k units. Margin Recovery Should Follow Volume and Mix. We forecast vehicle gross margin of 11.0% in 3Q and 13.5% in 4Q, versus 9.4% in 2Q, with consolidated margin improving to 12.4% and 14.3%, respectively. Higher volumes should improve fixed-cost absorption, while strong demand for higher-end trims supports mix. Management noted that the Livis version represents more than 85% of new L9 sales, indicating continued willingness to pay for differentiated chassis and intelligent-driving features. The i9 and refreshed MEGA should further improve ASP and mix from 4Q. Battery, memory and semiconductor cost inflation remains a headwind, and management does not intend to fully pass these costs to consumers. However, vertical integration across batteries, electric drive systems and the MACH M100 chip should gradually improve structural cost efficiency. Management views 15%-20% consolidated gross margin as a healthy long-term range. Our FY27 forecast of 15.7% remains conservative and only reaches the lower end of that range. We expect LI to return to profitability around 4Q26, with approximately RMB0.7bn of non-GAAP net income in the quarter and further improvement through 2027. Product and Technology Positioning Remains Intact. LI’s competitive position has not deteriorated as sharply as its earnings outlook. The L-series refresh is largely complete, while the company is moving toward a more balanced EREV/BEV portfolio. Management indicated that EREV and BEV each represent roughly half of sales, with BEV share likely to rise as new models launch. LI also continues to invest in differentiated technology. MACH M100 shipments have exceeded 50k units, VLA capabilities are expanding through OTA updates, and proprietary batteries are being deployed across more models. These investments weigh on near-term earnings but could support product differentiation and structural cost advantages over time.