While Li Auto management continues to believe that the new flagship full-size L9 SUV will sell very well, near-term demand for the Li ONE has been grossly overestimated.

Li Auto reported solid second-quarter earnings yesterday, but weak guidance for the third quarter caused shares to fall 7 percent at one point in pre-market trading, despite closing 0.22 percent higher.

As is usual, Deutsche Bank analyst Edison Yu provided his first look of Li Auto's earnings report Tuesday, noting the things he focused on.

The following is the full text of the research note.

2Q22 Earnings First Look

Li Auto reported solid 2Q results as we previewed but very weak 3Q guidance, reflecting what appears to be a steep near-term decline in Li ONE demand.

Deliveries were previously reported for 2Q at 28,687 units, leading to revenue of 8.7bn RMB (vs. our 8.7bn forecast and consensus at 8.0bn).

Total gross margin of 21.5% matched our model (consensus at 21.0%), boosted by Services & other margin of 32.9% vs. our 27.5% forecast.

Opex of 2,857m was slightly above our/ consensus expectations. All together, adjusted EPS of (0.17) hit our estimate and was better than consensus.

Free cash flow of 452m was materially stronger than anticipated despite in-line capex, supported by robust working capital performance.

Management provided very weak guidance for 3Q22 calling for only 27,000-29,000 deliveries, materially below our/consensus estimates.

While management continues to believe the new flagship full-size L9 SUV will sell very well (10,000 in Sep alone), we grossly overestimated near-term demand for Li ONE.

We attribute weakness to speculation about a L8 SUV (X02) coming soon (potentially Oct/Nov) built on 2nd gen EREV platform with a cockpit interior similar to L9 (eventually replacing current Li ONE) causing customers to delay purchases, greater cannibalization by L9, and to lesser extent, competitive pressure (e.g., Seres/ Huawei AITO M5/M7).

In fact, the company just introduced a 7k RMB promotion this past weekend to help boost Li ONE orders (delivery times now just 2-3 weeks).

Revenue is expected to be 8.96-9.56bn in 3Q, missing our/consensus forecasts calling for >13bn.

For the rest of the year, 4Q volume will be heavily influenced by timing/cadence of L8 and effectiveness of promotions on Li ONE.

Gross margin appears to be trending upward as battery costs come down and L9 garners higher contribution.

However, we think 3Q could be flattish QoQ (or even down slightly) as L9 is just ramping and promotional activity hurts Li ONE; 4Q should be higher based on full quarter of L9 sales. On opex, R&D is still expected to be ~7bn for the full-year and SG&A should show improvement YoY as % of sales.

Li Auto rumored to launch new SUV Li L8 soon