China EV Earnings Season: Morgan Stanley Sees Solid 4Q25 Prints, But Warns Market Focus Is Already Shifting to 2026 Demand Risks
A new Morgan Stanley report published on February 9, 2026, offers a measured preview of China’s electric vehicle earnings season, arguing that while fourth-quarter results across major EV makers are likely to meet already-lowered expectations, investor attention is rapidly shifting toward demand risks and margin sustainability in early 2026. The note matters because it captures a turning point in market psychology: profitability milestones are no longer enough to drive re-rating in a sector increasingly defined by competition, pricing pressure, and macro uncertainty.
The bank’s core message is straightforward. “We don’t expect 4Q prints to substantially surprise the market on either side,” the report states, suggesting that operational execution has stabilized but that the next catalyst lies in forward guidance rather than backward-looking results.
Profitability Achieved, But Expectations Reset
Morgan Stanley expects most China EV start-ups to report profitable or near-breakeven fourth quarters, reflecting cost discipline and improved scale economics rather than strong end-demand.
NIO is highlighted as a potential bright spot. The bank expects fourth-quarter vehicle gross margin to reach around 20.5%, supported by strong ES8 sales, implying group-level gross margin above 20%. Revenue is projected at approximately RMB 34 billion (US$4.7 billion), near the top end of company guidance, with net profit expected in the RMB 200–700 million range.
XPeng is expected to achieve its long-awaited profit breakeven, with fourth-quarter revenue estimated at RMB 20.8 billion (US$2.9 billion). However, margin expansion appears limited, with vehicle gross margin slipping slightly due to promotions and cost inflation, underscoring how competitive intensity continues to cap profitability upside.
Li Auto, meanwhile, may deliver a modest upside surprise. Deliveries reached the high end of guidance, and restructuring-driven cost reductions are expected to narrow operating losses significantly. Morgan Stanley estimates fourth-quarter revenue of around RMB 29 billion (US$4.0 billion), with vehicle gross margin recovering sequentially despite pricing pressures.
The broader implication is that profitability, once the sector’s defining milestone, is becoming normalized. Markets are increasingly pricing EV makers as cyclical manufacturers rather than high-growth disruptors.
Scale Still Favors Incumbents
Among established players, BYD Company continues to demonstrate scale advantages. Morgan Stanley forecasts fourth-quarter revenue of roughly RMB 242 billion (US$33.7 billion), with gross margin rising modestly to 18.1% as overseas sales mix improves and volume growth offsets cost pressures. Net profit is estimated at around RMB 11 billion.
The report notes that overseas expansion and continued investment in autonomous driving and sales channels are driving operating expense growth, largely in line with revenue expansion. Investors, however, are watching whether industry “anti-involution” dynamics—policy and market signals aimed at reducing destructive price competition—can restore pricing discipline by the second quarter of 2026.
Geely Automobile presents a more mixed picture. While deliveries and revenue growth remain solid, Morgan Stanley expects margins to compress slightly due to retail discounts and ongoing price pressure, potentially resulting in a modest downside surprise versus consensus expectations.
The Real Story: 1Q26 Demand Risk
The report’s most important takeaway lies beyond fourth-quarter results. Across nearly all covered companies, Morgan Stanley expects first-quarter deliveries to decline sharply on a sequential basis, reflecting seasonal weakness compounded by industry headwinds.
For example, NIO’s first-quarter deliveries are projected to fall 42–46% quarter-on-quarter, while XPeng’s could drop nearly 50%. Even Li Auto is expected to guide for a sequential decline of roughly 25–29%.
This dynamic reflects a broader shift: investors are no longer asking whether Chinese EV makers can reach profitability, but whether demand can sustain current capacity expansion without further price competition.
Morgan Stanley concludes that management guidance on first-quarter risk and second-quarter recovery potential will likely dominate earnings calls. The pace of post–Lunar New Year sales recovery, supported by local subsidies and new model cycles, will be closely watched as a signal of whether the sector’s next phase is consolidation or renewed growth.
In short, China’s EV industry is entering 2026 with improved financial discipline—but also with thinner margins for error.