The sharp decline in gross margin was due to a huge hit of $803 million from inventory provisioning and loss of purchase commitments related to the accelerated phase-out of Li ONE.

Li Auto (NASDAQ: LI) yesterday reported weaker-than-expected third-quarter revenue, with gross margin slipping to a new low in more than two years.

However, the company's management gave slightly higher-than-expected delivery guidance for the fourth quarter, implying a strong rise in vehicle deliveries to around 20,000 in December.

Deutsche Bank analyst Edison Yu's team gave their first look of Li Auto's results in a subsequent research note sent to investors.

Here's what they had to say.

Li Auto reported soft 3Q margin as we previewed but provided a slightly better than expected 4Q volume outlook.

Deliveries were already reported for 3Q at 26,524 units, leading to revenue of 9.3bn RMB (vs. our 9.2bn forecast).

Total gross margin of 12.7% was below our already lowered 16.0% estimate, hurt by vehicle margin of only 12.0% (vs. our 15.4%).

This was caused by a large 803m hit from inventory provision and losses on purchase commitments related to the accelerated phase out of Li ONE.

Opex of 3,312m was above our expectation due to higher R&D (new model dev) and SG&A (marketing expense).

Free cash flow was (1,959)m, better than anticipated despite in-line capex, supported by another qtr of robust working capital performance.

Management provided slightly higher than expected 4Q guidance for 45,000- 48,000 deliveries, compared to our 44,000 forecast, implying Dec increasing to 20,000-23,000 range vs. Nov's 15,034.

Revenue is expected to be 16.5-17.6bn in 4Q, suggesting the vehicle mix is more skewed toward L8 than we modeled (i.e., lower blended ASP). Gross margin should normalize QoQ back to around 20%.

For the full-year, R&D is expected to be ~7bn, SG&A should come in at 12% of sales, and capex is trending to 5.5bn.

Looking at 2023, Li Auto will focus on maximizing sales volume of the L7-L9 with the smaller L6 SUV coming in 2024 and likely very immaterial contribution from BEVs (Whale and Shark).

The CEO believes company can potentially reach 100bn RMB in sales, compared to our/consensus in the low-mid 90bn. R&D is expected to increase to 10-12bn next year. And capex should be roughly 10bn.