Why Li Auto Inventory Has Appreciable Upside

Li Auto (NASDAQ:LI), the most important of the rising EV gamers in China, delivered 51,443 autos in October 2024, up 27.3% year-over-year. Nonetheless, gross sales had been down from 53,709 in September 2024.  Li’s whole deliveries year-to-date stand at about 393,255 autos, a rise of 38% in comparison with final 12 months. Li’s efficiency for the quarter was blended in comparison with rivals. Nio delivered 20,976 autos in October, displaying the strongest year-over-year development of 30%, though numbers had been roughly flat month over month. XPeng delivered 23,917 autos, a file for the corporate, up about 19% in comparison with final 12 months.  Though Li Auto didn’t break down the important thing drivers of its development, it’s fairly doubtless that the Li L6, essentially the most inexpensive mannequin within the firm’s lineup, had an enormous half to play. The car has gained reputation amongst youthful customers. The car, which was launched in April, is priced at about RMB 250,000 (about $34,500). Li additionally lowered costs for a number of of its fashions just a few months in the past and this has additionally doubtless helped help gross sales to an extent. Li indicated that it remained the chief within the premium EV house in China, focusing on the RMB 200,000 and above ($28,000) new power car market, for seven straight months.

Now regardless of the sturdy development. Li Auto inventory stays down by about 28% year-to-date. There have been a few headwinds for Li Auto. Competitors within the Chinese language EV market is intense, hurting the corporate’s common promoting costs and margins.  The Chinese language EV market is crowded, with over 100 manufacturers competing within the house.  Li can be doubtless seeing a decrease mixture of premium EV mannequin gross sales (such because the Li L7, Li L8, and Li L9) and the next mixture of the low-priced L6 mannequin. Li has seen its common promoting costs decline by about 15%  year-over-year to RMB 270,000 throughout the newest quarter.

Though Li beat earnings and income estimates for Q3 2024, the corporate’s car margin got here in at 20.9% within the third quarter, down 0.3% versus the final 12 months. Li’s steerage for This fall can be a bit lighter than anticipated. Whereas Li anticipated revenues of about $6.35 billion on the mid-point, up about 9% in contrast with the fourth quarter of 2023, this was under Wall Avenue estimates of $6.7 billion. Individually, China’s financial development has been weak because of a downturn in the true property market and a sluggish rebound from stringent Covid-19 lockdowns that ended over a 12 months in the past. Shopper spending and home consumption additionally stay blended. Nonetheless, the federal government just lately introduced a stimulus plan, which incorporates reducing rates of interest and financial help and this might assist shopper spending.

Now, the lower in LI inventory has been removed from constant. Returns for the inventory had been 11% in 2021, -36% in 2022, and 83% in 2023. Compared, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that LI underperformed the S&P in 2021 and 2022. In distinction, the Trefis High Quality (HQ) Portfolio, with a set of 30 shares, has outperformed the S&P 500 annually over the identical interval. Why is that? As a gaggle, HQ Portfolio shares offered higher returns with much less threat versus the benchmark index; much less of a roller-coaster trip as evident in HQ Portfolio performance metrics. Given the present unsure macroeconomic setting with excessive oil costs and elevated rates of interest, may LI face the same scenario because it did in 2021 and 2022 and underperform the S&P over the subsequent 12 months – or will it see a restoration?

Regardless of considerations concerning the economic system and weak spot within the international EV market, the Chinese language EV house continues to be displaying promise. There was a premiumization pattern within the Chinese language EV market, with vehicles costing upward of $30,000 accounting for a rising mixture of gross sales on the expense of lower-end EVs. This might play in Li Auto’s favor, because it competes primarily within the premium finish of the electrical car market.  The inventory trades at about $26 per share, about 1.3x consensus 2024 revenues, which isn’t costly contemplating that revenues are projected to develop by over 17% this 12 months and by about 30% subsequent 12 months per consensus estimates.  Compared, Tesla trades at about 7x ahead income, regardless of the very fact the revenues are prone to stay nearly flat this 12 months. If Li Auto buyers worth that inventory a bit extra generously, at about 2x ahead revenues, led by its bettering development and potential enchancment in margins, the inventory may see a substantial upside. See our evaluation of Nio, Xpeng & Li Auto: How Do Chinese language EV Shares Evaluate? for an in depth have a look at how Li Auto inventory compares with its rivals Nio and Xpeng.

[1] Returns as of 11/3/2024
[2] Cumulative whole returns for the reason that finish of 2016

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The views and opinions expressed herein are the views and opinions of the writer and don’t essentially mirror these of Nasdaq, Inc.