Li Auto's Q2 Earnings Miss and Weak Guidance Signal Near-Term Valuation Risks in a Fractured Chinese EV Sector

Li Auto’s Q2 2025 earnings report has exposed a critical inflection point for the company and the broader Chinese EV sector. Despite a 2.3% year-over-year increase in vehicle deliveries to 111,074 units, revenue fell 4.5% to RMB30.2 billion ($4.2 billion), missing analyst estimates of $4.45 billion [1]. This disconnect between volume and revenue underscores a pricing war that has eroded margins and investor confidence. The company’s Q3 guidance—projecting a 37.8% to 41.1% year-over-year decline in deliveries—has further stoked concerns about its ability to compete in a market dominated by BYD, which captured over 50% of new energy vehicle (NEV) sales in H1 2025 [3].

The root of Li Auto’s struggles lies in strategic misalignment. While the company has pivoted to battery-electric vehicles (BEVs) with the launch of the Li i8, its product mix remains skewed toward underperforming models like the L-series. The Li i8, priced at RMB339,800, has seen tepid demand, with deliveries expected to reach only 8,000–10,000 units by September [1]. Meanwhile, aggressive price cuts—driven by interest subsidies, sales incentives, and a weaker product mix—have dragged down the average selling price, contributing to a 4.7% year-over-year decline in vehicle sales revenue [1]. This pricing pressure is not unique to Li Auto; BYD and Tesla have also slashed prices, but the latter’s Model 3 continues to dominate the premium segment, leaving Li Auto’s brand positioning vulnerable [3].

The broader Chinese EV sector is grappling with a self-inflicted crisis. BYD’s executive Stella Li has openly criticized the price war as “unsustainable,” noting that margin compression is becoming a systemic risk [3]. Li Auto’s 19.4% vehicle margin and 20.1% gross margin, while slightly improved from Q2 2024, pale in comparison to the 25%+ margins of industry leaders like BYD [1]. The company’s Q3 guidance—projecting revenue between $3.5 billion and $3.7 billion—reflects a 38.8% to 42.1% year-over-year decline, a trajectory that could force further cost-cutting or product rationalization [4].

Valuation risks are compounded by Li Auto’s weak cash flow. Despite $110.7 billion in cash reserves, the company reported negative free cash flow of RMB3.8 billion ($536.3 million) in Q2 2025, driven by heavy R&D and marketing expenses [4]. Analysts have responded with mixed signals: Goldman Sachs reiterated a Buy rating with a $35.30 price target, while Macquarie downgraded to Sell with a $21 target [1]. The stock’s 8% post-earnings drop and 4.5% pre-market decline highlight the market’s skepticism about Li Auto’s ability to reverse its trajectory [2].

The sector’s global ambitions may offer a partial lifeline. Chinese EV firms are investing heavily overseas, with BYD and Chery expanding into Brazil, Thailand, and Turkey. However, these projects are costly and slow to scale, with only 25% of announced overseas EV manufacturing projects reaching completion [3]. For Li Auto, which lacks the international footprint of rivals like Nio (which has a UAE joint venture), overseas expansion remains a distant solution to its domestic challenges.

In conclusion, Li Auto’s Q2 earnings miss and weak guidance reflect a company struggling to adapt to a hyper-competitive market. While its 2,851 supercharging stations and upcoming Li i6 model may provide some respite, the broader sector’s margin compression and pricing pressures pose existential risks. Investors should monitor the company’s ability to stabilize its product mix and defend its premium positioning against BYD and Tesla. For now, the stock’s valuation appears precarious, with analysts’ divergent price targets underscoring the uncertainty ahead.

**Source:[1] Li Auto Inc. Announces Unaudited Second Quarter 2025 Financial Results, [https://ir.lixiang.com/news-releases/news-release-details/li-auto-inc-announces-unaudited-second-quarter-2025-financial][2] LI Earnings: Li Auto Stock Falls as Q2 Results Miss Estimates, [https://www.tipranks.com/news/li-earnings-li-auto-stock-falls-as-q2-results-miss-estimates][3] BYD Exec: China's EV Price War Unsustainable, [https://cnevpost.com/2025/06/13/byd-exec-ev-price-war-unsustainable/][4] Li Auto shares fall as Q2 earnings miss estimates, outlook disappoints, [https://finance.yahoo.com/news/li-auto-shares-fall-q2-093004446.html]