China EVs - 3Q25 preview – Could 4Q be the profitable season for all

Summary of Key Points from the Conference Call Industry Overview - Industry Focus: China Autos & Shared Mobility, specifically the Electric Vehicle (EV) sector in China [1][5] - Market Sentiment: The industry view is currently rated as "In-Line" by Morgan Stanley, indicating expectations of performance in line with the broader market [5][7] Core Insights - Earnings Expectations: - EV start-ups are anticipated to report 3Q results that align with market expectations, focusing on vehicle margins and operational expense control [7][10] - Investors are particularly interested in the operational turnaround of Original Equipment Manufacturers (OEMs) in 4Q and their strategies for model pipeline and pricing to counter cyclical challenges in 2026 [1][7] - Performance Metrics: - XPeng Inc. (XPEV): Expected 3Q vehicle margin and 4Q volume outlook to be in line with previous guidance [10] - Li Auto Inc. (LI): 3Q deliveries grew 12% QoQ to 116k units, with revenue projected at Rmb20.4 billion, indicating steady average selling price (ASP) [10] - NIO Inc. (NIO): 3Q deliveries of 87k units (+21% QoQ) were at the low end of guidance, with revenue expected at Rmb21.9 billion [10] - Future Projections: - For 4Q, Li Auto is expected to deliver between 130-135k units, while NIO anticipates a significant increase to 150k units, driven by new model contributions [10][10] Financial Metrics - Gross Profit Margins: - Li Auto's vehicle gross profit margin is expected to grow to 14.5% in 3Q, while NIO's is projected to be flat at 12.5% [10] - Operating Losses: - Li Auto's net loss is expected to be around Rmb500 million in 3Q, similar to the previous quarter [10] - NIO's net loss is projected to narrow to approximately Rmb4.3 billion in 3Q [10] Valuation Methodology - Li Auto Inc.: Utilizes a probability-weighted Discounted Cash Flow (DCF) methodology with a WACC of 15.9% and a long-term growth rate of 3% [11] - NIO Inc.: Also employs a probability-weighted valuation methodology, expecting to break even by 2028 with a WACC of 17.8% [12] - XPeng Inc.: Similar DCF methodology with a terminal growth rate of 3% and a WACC of 12.8% [13] Risks and Opportunities - Upside Risks: - Rapid sales volume ramp-up and better-than-expected margins could enhance profitability [14][15] - Downside Risks: - Increased competition and moderating auto sales growth could pressure overall industry valuations [15][17] Additional Insights - Investor Focus: There is a growing emphasis on non-vehicle initiatives, including AI and software services, which may significantly impact stock valuations [7] - Market Dynamics: The cyclical nature of the automotive industry and the potential for macroeconomic shifts are critical factors influencing future performance [1][11] This summary encapsulates the key points discussed in the conference call, providing a comprehensive overview of the current state and future outlook of the EV sector in China.