Li Auto's Downgrade by HSBC: Assessing Near-Term Risks and Long-Term Resilience in a Competitive EV Market

The recent downgrade of Li Auto (NASDAQ:LI) by HSBC from "Buy" to "Hold" underscores a critical juncture for the Chinese electric vehicle (EV) manufacturer. With its price target slashed to $18.60 from $30.30, the move reflects growing skepticism about Li Auto's ability to navigate near-term headwinds while maintaining long-term competitiveness in a rapidly evolving market. This analysis evaluates the strategic risks highlighted by HSBC, Li Auto's mitigation efforts, and the realism of its earnings outlook, drawing on recent financial data, strategic shifts, and independent analyst perspectives.

Near-Term Risks: Recall, Revenue Decline, and Competitive Pressures

HSBC's downgrade is anchored in three key risks. First, a RMB1.1 billion recall cost stemming from an on-road fire in late October 2025 has strained Li Auto's finances according to reports. This incident, coupled with battery supply constraints delaying the launch of the BEV i6 model, has disrupted delivery timelines and eroded investor confidence. Second, Li Auto's Q3 2025 revenue fell 36.2% year-over-year to RMB27.4 billion, driven by weaker demand for its extended-range electric vehicle (EREV) L series and higher manufacturing costs according to financial analysis. Third, intensified competition from rivals like Xiaomi, HIMA, and Zeekr has accelerated the contraction of Li Auto's EREV segment, with HSBC cutting its 2025 earnings forecast by 82% to RMB921 million.

These challenges are compounded by production bottlenecks. For instance, the i6 model's delayed ramp-up has limited Li Auto's ability to offset declining EREV sales according to market reports. Meanwhile, Macquarie analysts have echoed HSBC's concerns, lowering their FY26–FY27 volume estimates by 20% and 14%, respectively, citing margin pressures and weak demand.

Strategic Initiatives: AI, Product Cycles, and Global Expansion

To counter these risks, Li Auto has unveiled a multi-pronged strategy. The company is accelerating product development, shortening its vehicle platform iteration cycle from four to two years to stay agile in a fast-moving market. This includes a focus on design differentiation, moving away from a "family-style" aesthetic to more distinct models. Additionally, Li Auto is investing in in-house AI development, with plans to launch an AI system based on its M100 chips by 2026 to enhance user experience according to industry analysis. CEO Xiang Li highlighted progress in this area, noting a 91% monthly usage rate for the VLA Driver large model in October 2025 according to company data.

International expansion is another pillar of Li Auto's strategy. The company opened its first overseas retail center in Uzbekistan in November 2025 and plans to expand into the Middle East, Central Asia, and Europe according to official statements. This marks a reversal from its previous focus on domestic growth, driven by regulatory changes that curtailed reliance on parallel exports. However, analysts caution that execution risks remain high. Piper Sandler's Alexander Potter, for example, initiated coverage with a "Neutral" rating and a $19 price target, noting that global success is critical to justifying Li Auto's valuation but remains uncertain.

Earnings Realism: Mixed Signals and Valuation Discrepancies

Li Auto's Q3 2025 earnings report further muddied the outlook. While revenue of $27.36 billion slightly exceeded expectations, the company posted a net loss of RMB624.4 million, missing analyst forecasts of $0.64 per share by 43.75%. For Q4 2025, Li Auto projected revenue between RMB26.5 billion and RMB29.2 billion-well below the RMB36.99 billion estimated by analysts. Macquarie responded by trimming its 12-month target price by 19% to HK$66 and maintaining an "Underperform" rating.

Despite these challenges, some valuation models suggest Li Auto could still be undervalued. A discounted cash flow (DCF) analysis estimates an intrinsic value of $37.10 per share, implying a 50.4% discount to its current price. However, this optimism is tempered by concerns over the company's ability to scale global operations and maintain profitability amid fierce competition.

Balancing Risks and Resilience

Li Auto's strategic initiatives-particularly its AI development and international expansion-offer a path to long-term resilience. Its strong cash position (RMB98.9 billion as of Q3 2025) provides flexibility to invest in these initiatives. Yet, near-term execution risks, including production delays and competitive pressures, remain significant. HSBC's downgrade highlights the fragility of Li Auto's recovery narrative, particularly given its reliance on the i6 model to drive growth.

For investors, the key question is whether Li Auto can translate its strategic ambitions into tangible results. While the company's focus on AI and global markets aligns with broader industry trends, its ability to execute will determine whether it can regain its "Buy" rating or remain mired in the "Hold" category.