Li Auto: A Stock With Room to Grow
2024 has been a rollercoaster for Li Auto (LI), a company known for its New Energy Vehicles (NEVs) and specializing in Extended Range Electric Vehicles (EREVs). The year started on a low note with a disappointing launch of its first fully electric vehicle and a drop in Q1 deliveries, causing some investor unease. However, the narrative took a positive turn in March, and now, with additional support from the Chinese government in the form of economic stimuli, there's a growing case for investor optimism.
China's Stimulus: A Boost for Li Auto
Based in Beijing, Li Auto focuses on EREVs which combine battery technology with traditional combustion engines, providing impressive range capabilities. The company's marquee model, the L6, boasts a range of 1,390 kilometers. Despite a rocky start with the Li Mega, their first all-battery vehicle, Li Auto’s deliveries have rebounded significantly. By early September, deliveries surged to 288,103 vehicles, marking nearly a 40% increase from 2023.
The recent stimuli from the Chinese government, including interest rate cuts and reduced bank reserve requirements, have injected new vitality into the market. Such measures are likely to bolster consumer spending power and confidence, indirectly benefiting Li Auto by fostering a more favorable economic environment.
Impressive Delivery Growth
Although the stock has dropped 34.4% year-to-date, the impressive recovery in vehicle deliveries stands out. July set a new record with 51,000 cars delivered, driven primarily by the affordable L6 model. With deliveries exceeding 20,000 units in August alone, the company's management anticipates continued growth. They forecast between 145,000 and 155,000 vehicles in Q3, maintaining a robust monthly average of around 50,000.
Competitors like Nio (NIO) and Xpeng (XPEV) are predicted to grow deliveries at a slower pace compared to Li Auto’s anticipated 38% to 47.5% in Q3. This recovery, spearheaded by the L6 model, is a key driver behind the company’s momentum.
Leading on Margins
Li Auto is setting the pace in vehicle margins among its peers. The company reported an 18.7% margin in Q2, outpacing competitors such as NIO and XPeng and even industry giants like Tesla (TSLA) and BYD (BYDDF). Despite a small dip from the previous quarter, Li Auto’s margin remains significantly higher than that of its closest competitors. This indicates superior profitability and a lower-risk profile for investors.
Valuation Still Attractive
Despite the recent upswing, Li Auto remains an affordable option in the market. With a forward P/E ratio of 21.5x, it trades at a slight premium compared to BYD’s 19.8x but is substantially lower than Tesla’s 108x multiple. Its EV-to-sales ratio is also favorable, standing at just 0.65x, much lower than the likes of Nio, Rivian (RIVN), and XPeng.
Moreover, Li Auto’s cash position is robust, with a net cash of $11.25 billion, which bolsters its financial stability compared to peers.
Analyst Insights and Conclusion
Analysts are moderately optimistic about Li Auto, with a consensus rating of "Moderate Buy" based on six buys and three holds. The average target price is $27.26, suggesting an 8% potential upside.
In conclusion, Li Auto remains a compelling investment opportunity. The company’s industry-leading margins, solid delivery growth, and recent government stimuli point to continued success. As domestic demand rises, thanks to supportive economic measures, Li Auto is well-positioned to sustain its upward trajectory.
Stay tuned as Li Auto continues to evolve in this dynamic market, leveraging its strong fundamentals and strategic positioning to deliver value for its shareholders.
Disclosure: None of the information provided here should be interpreted as financial advice. Always do your own research before making financial decisions.
