China EVs – Diverging paths for XPeng & Li Auto

In 1Q26, both Li Auto and XPeng saw revenue declines on QoQ and YoY as NEV market growth slowed in China. However, their GPM diverged as XPeng saw improved ASP through product optimization, while Li Auto experienced sharp drop due to product transition. In May, both companies launched their new large six-seater SUVs with XPeng's GX saw strong orders from aggressive pricing, while Li Auto's upgraded L9 Livuis resulted in a relatively muted order intake compared to GX. Overall, we believe XPeng would outperform Li Auto in the following quarters.

XPeng (9868 HK, HK$66.45, HK$127 bn): Demonstrating Margin Resilience with Sustained ASP Uptick

XPeng's 1Q26 total revenue stood at RMB13bn (-17.6% YoY / -41.4% QoQ), beating consensus of RMB 12.8bn. Automotive revenue came in at RMB11bn (-23.5% YoY / -42.3% QoQ), also above RMB10.8bn consensus. Despite sales of only 62k units (-33.3% YoY / -46.1% QoQ), the higher-priced X9's delivery mix rose 6ppts QoQ to 15% and coupled with overseas sales at a record 18% of deliveries, lifting the ASP to RMB 175k.

Automotive GPM fell 1ppt QoQ to 12.1% due to diseconomies of scale, higher material costs and larger discounts, yet improved 1.6ppts YoY on better product mix optimization. Other income was RMB2.03bn (+41.2% YoY / -36% QoQ). The sharp QoQ drop reflected a high base from Volkswagen milestone payments in 4Q25 and lack carbon credit income this quarter, thus segment GPM fell 4ppts QoQ to 66.5%. Overall GPM stayed above 20%.

Continued R&D in AI and new models (RMB 2.91bn, +46.8% YoY) offset SG&A savings (RMB 1.88bn, -3.2% YoY / -32.5% QoQ). Against a low revenue base, OPEX ratio rose to 37%. Core operating loss widened to RMB1.87bn. As a result, 1Q26 recorded a net loss of RMB1.7bn, swinging from a profit of RMB0.51bn in 4Q25. Net cash in hand declined by RMB 9.4bn to RMB 25.5bn as of the end of March 2026.

Li Auto (2015 HK, HK$57.25, HK$123bn) Product Transition Struggles But Cash-Rich

Li Auto's 1Q26 total revenue amounted to RMB23bn (-11% YoY / -19% QoQ), below market expectations. Automotive revenue came in at RMB21.5bn (-13% YoY / -21% QoQ). Deliveries remained weak at 95k units (+2% YoY / -13% QoQ) and product mix continued to deteriorate.  The lower-priced i6 surged to 60% of total deliveries, while high-end (L9 and MEGA) slumped to only 5% combined. Ongoing discounting on legacy L-series to clear inventory drove ASP down to a record low of RMB 226k. Automotive GPM fell sharply to 6%, still above management's low-end guidance of 5%, pressured by lower scale efficiency from volume decline, higher material costs, and purchase tax subsidy amortization for i6. Other income was RMB1.45bn with GPM of 35%. As a result, overall GPM collapsed more than 10pct YoY and QoQ to a record-low 7.9%.

Despite ongoing operating expense optimization at RMB4.8bn (-6% YoY / -16% QoQ), the widening losses proved unstoppable. Core operating profit reversed from a profit of RMB0.27bn in 1Q25 to a loss of RMB3bn this quarter, and net profit flipped from RMB0.65bn to a loss of RMB2.3bn. Although free cash flow reversed by RMB10bn QoQ to an outflow of RMB7.4bn, net cash of RMB84.3bn remains ample.

Our views: Intensifying competition is the defining theme of today’s China's NEV market. Although Li Auto achieved early success through product differentiation and accumulated a substantial cash pile, it is currently navigating a difficult product transition. The company has responded by streamlining SKUs, adding features while keeping pricing flat, and planning a refresh of its L-series. The effectiveness of these actions remains to be seen.

In contrast, XPeng has emerged from its past trough. Its newly launched large six-seater SUV, “the GX”, has amassed over 60k orders, the highest in its segment. The company also aims to double overseas sales to 90k units this year. Moreover, XPeng is making tangible progress in physical AI with its AI chip and VLA 2.0 model remain on track.  Robotaxi pilots have started with third party software licensing, and a humanoid robot is scheduled for year end mass production targeting over 1k units per month. We believe that XPeng is commercializing physical AI faster than its peers while gradually moving beyond an "automaker" toward a technology oriented identity. Therefore, we currently favor XPeng's outlook in the following quarters. The counter is 1.14X FY26 P/S. (Research Department)