Li Auto Charging Ahead

Summary

  • Li has grown its deliveries tremendously since the early part of the year, going from 2,300 in March to over 8,500 in July.
  • Strong deliveries and revenue growth give Li a very attractive valuation against its Chinese peers NIO and XPeng.
  • While Li does only have one vehicle available and has not reached international sales, it does have those catalysts and more in its pipeline to drive growth.

Electric vehicle stocks are finding themselves back in favor, with quite a few seeing strong rallies through May to July after a March and April sell-off. Li Auto (LI) is one of the top performers in the group, rising over 105% in that rally and still holding on to a 92% gain since its May lows. Li has also seen strong deliveries recently, and has multiple upcoming catalysts that support such growth alongside a valuation lower than peers NIO (NIO) and XPeng (XPEV).

Deliveries Ramping Up

Li, just like many other automotive manufacturers, faced impacts from the chip shortage which hurt delivery numbers, but the past few months have seen the EV startup blaze ahead and claim the top spot against NIO and XPeng. Deliveries increased rapidly in just a few months’ time.

Delivering just 2,300 vehicles in March (down from over 5,300 in February), Li has powered forward with deliveries as it shrugged off the chip shortage and remains in hot pursuit of a five-digit delivery goal next month.

In terms of recent deliveries, Li’s May tally sat a 4,323 vehicles, +101.3% y/y, June jumped to 7,713 vehicles, +320.6% y/y against a weak comp but a new monthly record and +78.9% q/q, while July rose again to 8,589 vehicles, +251.3% y/y and +11.4% m/m to another consecutive monthly record. June’s sales were aided by the launch of the new 2021 Li ONE, which hit the market amid strong demand on May 25, a day before Li announced a goal to reach 10,000 monthly deliveries by September. New orders also reached a record in June. July’s sales carried that strong momentum from the new 2021 ONE, with some major OTA upgrades due later this year to enhance the in-vehicle experience.

Li’s YTD deliveries have reached 38,743 vehicles, over half of its lifetime deliveries, with the potential to more than double that for the remainder of the year with strong demand in the 2021 ONE and demand seasonality in the winter. With 10,000 deliveries targeted for September and the potential to average around that figure until year-end, Li could reach the mid-80,000 range for the year. This puts Li tentatively between 7,500-10,000 units below NIO and 15,000-20,000 above XPeng for year.

Attractive Valuation

Li currently lags NIO by about 40,000 vehicles on a lifetime basis, but is catching up as it scales deliveries and expands both its model line and its physical footprint. Revenues are growing at a rapid clip as vehicles are priced in the mid-300,000 yuan range, about the midpoint between XPeng’s G3 and NIO’s mid-to-high end options, and less than half of the Mercedes GLE. Ramping of deliveries late in Q2 and through August sets up a favorable trajectory for revenues, with Q2 projected to post nearly RMB5.2 billion (US$800 million), about 15% higher than the current consensus estimates. For the full year, revenues could close in on RMB22 billion, US$3.4 billion, should deliveries remain red-hot and exceed 10,000 by September.

 

Data by YCharts

When put in comparative terms, Li looks astoundingly cheap against its main startup peers. Given the forward revenue growth potential, Li trades at about 7.6x EV/revenues, a sharp discount compared to NIO and XPeng’s mid-12x, multiple, which they share with Tesla. In terms of revenue growth rates, one of the most important factors for these three, Li isn’t even behind, as it sits just above NIO; XPeng does have a much higher growth rate, but it had only started to scale late last year, so its comp figures are much easier.

On a longer-term basis, Li trades at just 4.6x FY22 revenues and 3.0x FY23, putting it closer to leading ICE manufacturers and top Chinese manufacturers who are jumping into EV headfirst and trade between 1.0x to 3.0x. NIO and XPeng are valued much higher – NIO at 7.4x for FY22 and 5.2x for FY23; XPeng, at 6.8x and 4.4x.

So what could be behind that valuation?

  • vehicle type: the ONE is an EREV (extended-range EV), a type of hybrid that uses a small combustion engine to significantly increase the range of the vehicle – another example is the BMW i3. The 2021 ONE boasts an integrated range of 1080 km, one of the longest in the industry, and an all electric range of 188 km. A comparable vehicle like the BYD Tang PHEV has a smaller battery, and therefore, a much smaller range.
  • limited vehicle lineup: Li currently only produces the ONE, while XPeng has both the P7 and G3, with multiple different editions, while NIO is working towards four, the ET7, EC6, ES6 and ES8. Li is reliant on one model to drive sales higher, and while it has done that successfully, it can be more prone to competitive pressures without a second model yet available, though it is in development.
  • international expansion: Li currently only sells its vehicles domestically, while both NIO and XPeng have tapped into Norway to kick-start international expansion plans; as such, its position behind peers in terms of global expansion could be a cause of a lower valuation

Even so, these factors are not a cause for worry – EREV and other hybrid vehicle types are still have an important role in the EV revolution, as they bridge the gap between ICE and BEV by providing the benefits of both systems – less emissions, and long range, while still pushing the technological edge. For Li, it’s working with NVIDIA’s Huizhou Desay to develop up to level 4 autonomous driving capabilities.

Aside from its ability to compete technologically with both NIO and XPeng and others like Tesla, there are a few other factors and catalysts that make Li look attractive at these multiples:

  • margins: Li’s vehicle margin sits in the high-teens, and while NIO has worked itself to those levels, XPeng has not. With that margin profile, Li sits much closer to profitability – its net margin is just -3.6% on a TTM basis, with a profitable Q4, compared to NIO’s -38.3% and XPeng’s -34.2%. With a positive outlook for the remainder of the year, Li could potentially reach profitability, delivering a few cents per share in profit for the year if vehicle margin remains above 16% and deliveries exceed estimates.
  • more innovation: Li is planning to invest about RMB3 billion in R&D, helping to advance in-vehicle tech as well as to research, test, and build upcoming vehicle models; some funding will also go to creating an international sales team, and planning international expansion.
  • more funding: Li recently launched its proposed global offering of 100 million class A ordinary shares, for Hong Kong and internationally. The proceeds are expected to be used for “research and development of HPC BEV technologies, platforms, and future models, intelligent vehicle and autonomous driving technologies, and future EREV models; expansion of production capacity, retail stores, delivery and servicing centers, roll-out of HPC network, and marketing.” Shares are also fully fungible between NASDAQ and Hong Kong, so any de-listing threats would not necessarily harm shares.
  • more vehicle models: although Li has just the ONE at the moment, it’s working on a multi-vehicle lineup, of which reportedly includes 4 other models – competing with the GLE/GLS, and the Model Y/X. Pricing is expected to be between RMB250,000 to RMB400,000 for all the models, depending on the size and type – a second EREV is due in 2022, while a pure BEV model is expected by 2023, although there are rumors that it could come in 2022, ahead of schedule. This could increase costs and push margins slightly lower, but it’s a necessary step for Li.
  • more sales and servicing stations: Li is at the helm of “accelerating the expansion of its direct sales and servicing network,” with 109 stores in 67 cities and 176 servicing centers in 134 cities. More expansion makes the vehicles accessible to more customers, serving as another way to drive deliveries.

Li has the right synergies in place to secure its valuation, and possibly command a higher one, closer to NIO’s and XPeng’s multiples, as the manufacturers work to scale deliveries and expand its vehicle lineup. Competitive pressures stemming from a fragmented Chinese market and having just one vehicle on the market at the moment could pose a risk until more vehicles are available next year and in 2023, while a late entry to international markets also opens up competitive risk from NIO and XPeng and other peers. Other than that, Li looks quite attractive at its current valuation.

Overall

A lower valuation than its peers, strong deliveries and revenue growth, and upcoming catalysts in the form of more models and more stores, among others, lends to a positive outlook for Li. A focus on a single EREV model for now could be a factor in its lower valuation, but its growth factors are all intact, and it’s not behind at all in terms of revenue and delivery growth – this could see the manufacturer find some multiple expansion, or multiple maintenance should manufacturers like NIO and XPeng witness multiple contraction. Trading at just 3.0x FY23 sales puts it just slightly more expensive than ICE peers, but Li boasts the growth rates of EV, and a push towards profitability, lining it up as one of the top choices in Chinese EV.

Author: Damien Robbins, Seeking Alpha

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