Li Auto Inc (NASDAQ: LI) reported a disappointing first-half performance on August 26, with revenue falling 13.4% year-on-year to 48.65 billion RMB and net profit swinging from a 1.744 billion RMB gain in the prior-year period to a 3.981 billion RMB loss.

As the first new-energy vehicle maker to achieve profitability back in 2023, Li Auto's earnings have steadily deteriorated since then, sliding from 11.809 billion RMB in 2023 to 1.139 billion RMB last year, before now plunging back into loss territory. Gross profit tumbled 59.2% to 4.644 billion RMB in the first half, with the gross margin slumping from 20.3% to just 9.5%.

The shift from profit to loss was largely driven by the transitional pain of product line renewals, while rising costs also weighed on profitability. On a brighter note, several second-quarter metrics improved versus the first quarter, with revenue up 11.7% quarter-on-quarter, gross margin recovering to 11% from 7.9%, and operating cash flow turning positive.

Notably, Li Auto's headcount dropped by approximately 3,680 employees to 27,000 by mid-year, a year-on-year reduction of about 12%. The company, once dubbed the "king of extended-range vehicles," is now firmly pursuing a dual-track strategy combining extended-range and pure-electric models, while steadily advancing its international expansion with a phased market-entry approach.

First-half revenue reached 48.65 billion RMB, down 13.4% from 56.172 billion RMB a year earlier. Vehicle sales revenue fell 14.9% to 45.6 billion RMB, which Li Auto attributed to lower average selling prices from a different product mix and reduced delivery volumes. Deliveries slipped 5.1% to 193,000 vehicles, with second-quarter deliveries dropping 11.5% to 98,000 units.

Despite the delivery decline, total sales costs only decreased 1.7% to 44.006 billion RMB. This scissors effect between revenue and costs drove a sharp deterioration in profitability. Gross profit fell 59.2% to 4.644 billion RMB, while the gross margin plummeted from 20.3% to 9.5%. Vehicle gross margin came in at just 7.8%, down 11.8 percentage points year-on-year.

Several profit metrics turned negative in the first half. Operating losses reached 5.3 billion RMB versus a 1.099 billion RMB operating profit a year earlier, while net losses hit 3.981 billion RMB. R&D spending remained heavy at 5.498 billion RMB, up 3.3% year-on-year, though total operating expenses fell 3.3% to 9.944 billion RMB thanks to a 17.6% reduction in selling, general, and administrative costs to 4.327 billion RMB.

Li Auto said the SG&A decline was mainly due to lower employee compensation. By end-June, the company employed 27,000 people, down 3,680 from end-2025, a roughly 12% decrease. Headcount reductions were spread across research and development (359), production (1,382), sales (1,552), and general and administrative functions (387). Total employee compensation expenses, including share-based payments, fell 7 billion RMB to 6 billion RMB in the first half.

Despite the weak overall first-half performance, Li Auto's second quarter showed sequential improvement over the first quarter. Q2 revenue reached 25.667 billion RMB, down 15.1% year-on-year but up 11.7% quarter-on-quarter. Vehicle sales revenue was 24.067 billion RMB, down 16.7% year-on-year but up 11.8% sequentially. Deliveries of 98,000 vehicles in Q2 represented a decline of 11.5% year-on-year but a 3.4% increase from Q1.

Quarterly profitability also showed signs of recovery, with gross margin rising to 11% from 7.9% in Q1, and vehicle gross margin improving to 9.4% from 6.1%. Operating losses narrowed 23.3% quarter-on-quarter to 2.301 billion RMB, while net losses contracted 25.1% to 1.705 billion RMB. Operating cash flow turned positive at 15 million RMB, compared to a net cash outflow of 3.036 billion RMB in the year-ago quarter. Free cash flow improved to negative 1.301 billion RMB from negative 3.842 billion RMB last year. Li Auto's cash position stood at 87.5 billion RMB by end-June, down 13.7 billion from 101.2 billion at end-2025.

Meanwhile, the company's 1 billion USD share buyback program, announced on March 24, has seen approximately 92 million Class A ordinary shares repurchased, including about 24 million American Depositary Shares, for roughly 632 million USD. Despite these efforts, the stock has continued to slide, with the Hong Kong-listed shares falling more than 25% since the buyback announcement to 47.98 HKD, pushing the market capitalization below 100 billion HKD.

The profit swing was substantially driven by product transition pains. This May, Li Auto launched the all-new Li L9, followed by the new Li L8 in June and the next-generation Li L6 in July. During this renewal phase, clearance promotions on older models dragged down average selling prices, while new model deliveries were still ramping up and hadn't yet fully released their profit potential. President Ma Donghui acknowledged, "During the model transition period, factors such as clearance sales of old models, ramp-up of new products, and policy transitions have created phase-related operational pressure, and we are optimizing these processes."

Industry observers note that Li Auto previously benefited from the extended-range market boom to achieve rapid profitability growth, but the transition to pure-electric vehicles is still in its formative stage. Currently, the order mix between extended-range and pure-electric models is roughly balanced. CEO Li Xiang stated during the earnings call, "We expect the share of pure-electric vehicle orders to continue increasing going forward."

CFO Li Tie noted that the launch of the new Li L9 helped push Q2 gross margin back to 11%. "With continued product mix optimization, higher share of Livis version sales, and the launches of the refreshed pure-electric models and Li i9, gross margins will improve further in the second half," he said.

Cost pressures also loom large. Li Xiang acknowledged that rising costs for core components like batteries and storage chips are a shared challenge across the industry. Given Li Auto's high degree of product intelligence and greater usage of storage and semiconductor components, the cost impact is more pronounced. Still, Li Xiang gave his assurance: "Li Auto will not pass on cost increases to consumers."

To address cyclical cost volatility, Ma Donghui outlined two measures: continuing refined operations to reduce costs, and building long-term structural cost advantages through full-stack in-house R&D and an independent supply chain system. For the third quarter, Li Auto expects further gross margin improvement as the fully renewed L series models enter full delivery and the pure-electric product lineup expands.

Looking ahead, the new-generation Li L6 launched in July, alongside a new rear-wheel-drive long-range version of the Li i8. In September, the new-generation Li MEGA and Li i9 will hit the market. Li Xiang set an ambitious target: "With the launches and ramp-up of several models in the second half, we are confident of achieving top-three sales among all brands in China's passenger car market above 200,000 RMB."

For Q3, Li Auto forecasts vehicle deliveries of 95,000 to 100,000 units, up 1.9% to 7.3% year-on-year, with total revenue of 26.6 to 28 billion RMB, representing a change of -2.8% to +2.3% year-on-year.

In line with the broader industry trend of overseas expansion, Li Auto is intensifying its international presence. The company is adopting a phased approach across different markets, partnering with leading local distributors to rapidly build complete sales, delivery, and after-sales service systems. New vehicle models are developed with overseas regulatory compliance in mind from the design stage, with localized software and hardware optimization for regional use cases.

In April, Li Auto signed agreements with leading dealers in the UAE and Saudi Arabia. In July, the new Li L9 launched in Kazakhstan and Uzbekistan, with the first overseas localized assembly production commencing in Kazakhstan. In September, the new Li L9 will launch in Dubai, marking the company's entry into the Middle East. Subsequent products will debut at the Paris Motor Show. Ma Donghui revealed that Li Auto is maintaining its premium brand positioning in overseas markets, "with the Li L series extended-range models serving as the core products in the Middle East and Central Asia markets."