- The Chinese EV market is hot.
- Li Auto is growing sales and deliveries at a faster rate than NIO.
- Li Auto’s dollar sales growth is valued more cheaply than NIO’s.
Chinese EV makers Li Auto and NIO are facing strong long-term growth prospects and a massive revenue ramp until 2025. Given the choice, which EV maker offers the better value, Li Auto or Nio? This article will provide the answer!
Why Li Auto is a strong choice to play the Chinese EV market
The Chinese government is pushing for higher EV adoption around the country and has laid out specific goals to increase the number of electric vehicles on the road. By 2025, Beijing wants 20% of new car sales to come from zero-emission vehicles. Beijing and local governments heavily support the purchase of electric vehicles which makes China one of the most friendly countries for the adoption of electric passenger cars.
China, due to its large population size, presents the biggest market and revenue opportunity for any EV maker in the world. In 2020, China sold more than 1.3M electric vehicles. Projections show that China will remain the hottest market for electric vehicle makers at least until 2040. No other country is estimated to put more electric vehicles on the road than China.
(Source: Bloomberg New Energy Finance)
The Chinese EV market is growing rapidly and already home to the world’s largest EV stock as Beijing heavily incentivizes buying electric vehicles through purchase subsidies. According to Statista, the global EV stock – the number of electric vehicles already on the road – surpassed 10M for the first time in 2020, with the biggest share, 44%, coming from China.
The large market for electric vehicles, favorable government policies that encourage the purchase of EVs and a strong EV adoption rate make China one of the most attractive markets for companies like Li Auto or NIO.
Li Auto is most famous for the production of the Li ONE… a luxury six-seater electric sport utility vehicle which competes against NIO’s ES8. The ES8 is also a sport utility vehicle and available as a six or seven-seater SUV version. While NIO is currently producing three different models (all SUVs) and is getting ready to bring to market its first all-electric sedan, the ET7, next year, Li Auto is a one-product company. The Li ONE SUV is the only passenger vehicle Li Auto produces, and it is a best-selling (#4) electric vehicle in China.
For the first time ever, Li Auto surpassed more than 8,000 in monthly deliveries in July, which has been a major milestone for the EV start-up. XPeng delivered more than 8,000 vehicles in July, also reaching a new delivery record. Both Li Auto and Xpeng delivered record numbers of EV vehicles at a time when NIO’s deliveries dropped below 8,000 because NIO’s factory output is still hampered by the semiconductor supply shortage. However, NIO expects to ramp up production in Q3’21 and increased its delivery estimate to between 23,000 and 25,000 passenger vehicles for the current quarter. NIO still has, however, the largest year-to-date total in deliveries, with 49,887, compared to 38,743 for Li Auto.
Li Auto is also beating NIO regarding growth: It delivered 8,589 Li ONEs in July, generating 251.3% year over year growth. NIO delivered 7,931 vehicles in July 2021… with deliveries showing a year over year growth rate of 124.5%.
Li Auto is a fairly new EV start-up. The company was founded in 2015 and revenue-generating operating activities only started two years ago. Due to beginning mass production of the Li ONE in late 2019, FY 2020 was a milestone year for Li Auto. In FY 2020, Li Auto generated $9.46B Chinese Yuan in revenues, which is the equivalent of US$1.45B. Although Li Auto only started mass production in 2019, the EV maker dramatically lowered its losses in 2020 and is approaching yet another critical milestone: It is eyeing short term profitability. Li Auto is expected to be profitable in FY 2022, one year ahead of NIO, and two years ahead of XPeng.
(Source: Li Auto)
Li Auto vs. NIO: Sales growth
NIO is the larger of the two companies, with revenues of 8.45B Chinese Yuan (US$1.31B) in the most recent quarter, Q2’21, showing 127.2% year over year growth. Li Auto generated revenues of 3.58B Chinese Yuan (US$545.7 million) in the first quarter of 2021, showing 319.8% Y/Y growth. Results for Li Auto’s second-quarter have not been released yet. NIO’s revenues are 2.4x larger than Li Auto’s and NIO’s market capitalization is about 2.1x larger than the market value of Li Auto.
Looking at sales projections, Li Auto is expected to grow revenues to $3.25B in FY 2021 and $5.42B in FY 2022 while NIO is projected to see total revenues of $5.61B this year and $9.34B next year. With 475% total expected sales growth from 2021 to 2025, Li Auto is growing significantly faster than NIO. Li Auto’s rival is projected to grow revenues 140% over the next four years. What makes Li Auto a potentially better investment in the EV sector than NIO is that the EV maker is growing faster and Li Auto’s dollar sales growth has a lower price than NIO’s.
|Li Auto and NIO Valuation|
|FY 2021 Est. Revenues||$3.25|
|FY 2022 Est. Revenues||$5.42|
|Market-cap-to-sales (FY 2021)||9.35|
|Market-cap-to-sales (FY 2022)||5.61|
|Est. Revenue Growth FY 21-25||474.8%|
|FY 2021 Est. Revenues||$5.61|
|FY 2022 Est. Revenues||$9.34|
|Market-cap-to-sales (FY 2021)||11.17|
|Market-cap-to-sales (FY 2022)||6.71|
|Est. Revenue Growth FY 21-25||139.6%|
Differences between Li Auto and NIO
The main differences between Li Auto and NIO lie in the product line-ups and in additional revenue opportunities. Li Auto is just manufacturing the Li ONE SUV while NIO is offering a more diversified portfolio with three current sport utility vehicle models and a new sedan product in the pipeline.
Possibly the biggest differentiating factor between Li Auto and NIO is that NIO is decoupling battery prices from vehicle prices. To do this, NIO offers a battery-as-a-lease model which creates a significant long term revenue opportunity based on monthly subscriptions. Simultaneously, NIO is expanding its battery swapping and recharging station network and aims to have 4,000 stations in place by 2025. The build-out of NIO’s swapping and recharging station network greatly improves the lure of the BaaS model and could draw millions of prospective EV buyers into the subscription program long term. The value of BaaS could be $500M or more annually by 2025.
Risks with Li Auto
Li Auto is a one-product company with comes with both risks and opportunities. Rolling just one product off of factory belts streamlines production and makes Li Auto easy to understand as an investment.
The chip supply shortage has limited factory output in the global auto industry and EV makers were also affected. There are signs that the chip shortage is easing, but new COVID-19 outbreaks or new lockdown orders pose a risk for Li Auto’s production and the stock.
This year, the Chinese government started to crack down on multiple sectors in the private economy, chiefly tech, E-Commerce and education firms. The risk of government intervention in the EV sector is probably low as EV makers are mostly start-ups and don’t dominate the industry. Additionally, Beijing encourages strong EV adoption rates in the country through policy. But, the crackdown may erode trust in China-based companies and their stock prospects. While a de-listing of Chinese companies in the US is not very likely, Chinese stocks have a higher risk than US stocks.
Li Auto may be the better choice in the EV sector compared to NIO because the EV maker is having massive success with its Li ONE SUV and is growing faster than NIO. Li Auto’s deliveries are now on the same level as NIO’s and the company is projected to grow even faster than NIO in the next four years. Additionally, Li Auto’s delivery and revenue growth is cheaper relative to NIO’s which implies higher revaluation potential for Li. What works in favor of NIO is the BaaS revenue opportunity which could prove to be a major revenue source in the future.
Author: The Asian Investor, Seeking Alpha