Li Auto: EREV Is A Unique, Great Way To Play Chinese NEV

Summary

  • Li Auto is utilizing their EREV technology to carve out a niche in the Chinese NEV market.
  • The Li ONE offers solutions to problems that EVs typically face.
  • Li’s sales are growing strongly relative to the Chinese market.
  • China’s crackdown should not harm Li over the long term.

Thesis

There has been a continued push by the world to move to electric vehicles, and several companies are set to benefit from this. Tesla stock had a historic run to ludicrous valuations. China forerunner Nio Inc.’s stock is also up massively.

A smaller competitor in the Chinese market, Li Auto, takes a unique angle on the new energy vehicle (NEV) market. They offer EREVs, or extended-range electric vehicles.

Li’s unique product and the benefits that come with it should allow Li to carve out a niche in the market, and their recent numbers are promising.

Li has a great product and a promising future; for that reason, Li is a good buy.

Unique technology

The market for EVs in China is congested, with some accounts putting the total number of EV producers at 300. The thing is, the Li ONE is not an EV. Instead, it is an EREV, which is essentially a hybrid vehicle. The gas acts as a generator for electricity and does not directly power the vehicle.

With a 40.5 kWh battery, and an 11.9-gallon tank, the Li ONE, their flagship and only model, boasts a range of 1080 kilometers, or ~670 miles. This range is much greater than their competitors.

What problems does that solve?

Innovative technology only impacts shareholders when it solves a real problem, and in this case, it solves several.

For one, consumers no longer have to rely on new, and often sparse, electric vehicle infrastructure. Instead, they have the option to switch between electric and gas power and use whatever is convenient. This allows anxiety-free road trips and makes them accessible to rural communities where there are fewer charging stations.

Secondly, it helps with range anxiety. A 670-mile total range is comparably insane. The newest Tesla, the 2021 Model S Plaid, touts a total range of 390 miles. The Li ONE beats that by 280 miles.

The lack of a massive battery pack eases the price as well. Compared to two other competitors in the high-end NEV SUV market, the Tesla Model X and Nio ES8, the Li one is substantially cheaper. The Tesla Model X costs ~$80,000, the Nio ES8 costs ~$65,000, while the Li ONE only costs ~46,000. In this case, buying the Li one will save $34,000 and $19,000, respectively.

Why is this needed?

While EVs sales are growing at triple-digit rates YoY, they still command only a tiny portion of the total Chinese NEV market.

Source: Statista

It is clear that NEVs still have a long way to go before getting a majority share in the Chinese market. That being said, Li being able to lower the cost, extend the range, and ease reliability on infrastructure is a fantastic start.

Is it working?

When looking at sales numbers, it is clear that Li is doing something right.

Here is the overview of EV sales in China in January 2021.

Source: Clean technica

Li is #7 on the list, with 5,379 vehicles sold.

And here are the numbers from August 2021.

Source: Clean Technica

Li is #4, with 9,422 vehicles sold.

As we can see, Li is growing in both absolute and relative sales in China. This is a strong indicator that the market is accepting and realizing the benefit of this technology. This is important as it acts as a crucial proof of concept to their technology and will most likely continue.

Addressing China

To write an article during these times and not address China would be omitting an important detail.

China has been on an absolute legislative rampage recently, and Chinese stocks are feeling the hit. Especially the tech companies. Here is the chart of (KWEB), the Chinese internet ETF, over the past year.

Source: Google Finance

Down over 50% from highs, it is clear that any US-listed Chinese company may be volatile for the foreseeable future.

However, besides temporary volatility, I don’t see this having a significant long-term effect on the underlying for one main reason. China loves electric vehicles, and it shows in their past policies. For them to do a complete 180 on NEVs, especially after cracking down on their steel industry for environmental reasons, would make little sense.

While investors should keep an eye on China, they should not let the CCP scare them away from a position. Contrarily, any decrease in share price as a result of the situation is a buying opportunity.

Conclusion

The Chinese NEV market is growing rapidly but is far from controlling the majority of vehicle sales for a number of reasons. However, Li’s EREV technology can solve or alleviate many problems consumers typically have with EVs, and it is showing in recent sales numbers. While China’s government may cause some short-term volatility in the share price, Li looks like it will be a long-term winner.

Author: Moonshot Equity Analysis, Seeking Alpha

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