Li Auto: Several Potential Catalysts Could Fuel Upside

Chinese electric vehicle companies have been on a high growth trajectory. Even amid the pandemic, EV sales have remained strong. With the economy crawling back to normalcy, EV sales growth can potentially accelerate.

On Feb. 25, Li Auto (LI) reported fourth quarter and full year results for 2020. The company’s performance was impressive and it’s very likely that LI stock will trend higher from current levels.

Most noteworthy was LI’s vehicle deliveries. For Q4 2020, Li reported total deliveries of 14,464 vehicles, which reflected a 67% increase on a quarter-on-quarter basis.

It’s worth noting that the company’s first EV model, Li ONE, was launched in November 2019. For Q1 2020, vehicle deliveries were 2,896. Therefore, on a sequential basis, the performance has been stellar.

A Look At Some Financial Highlights

From a financial perspective, there are several upside catalysts.

The first point to note is that Li Auto reported a loss from operations of $12.1 million for Q4 2020. For the full year, the loss from operations was $102.6 million. It’s clear that operating level losses have narrowed significantly. Therefore, it seems likely that Li Auto is positioned to report operating level profits for Q1 2021. As operating margins expand on growing vehicle deliveries, the stock can trend higher.

Another important point to consider is that Li Auto reported operating cash flow of $481.2 million for FY2020. For the same period, free cash flow was $377.7 million. This is significant as the company is still at an early growth stage.

Robust free cash flows will allow a part of research and development financing to come from internal cash. As free cash flow accelerates, the company will be well positioned to create incremental shareholder value.

It should also be noted that Li Auto reported cash and equivalents of $4.58 billion as of December 2020. With a strong cash buffer and improving free cash flow, the company is well financed for the next 12-24 months, and a low possibility of equity dilution is good news for the stock.

Business Growth Triggers

Li Auto has guided for the delivery of between 10,500 to 11,500 vehicles in Q1 2021. On a year-over-year basis, deliveries will be up by 262.6% to 297.1%. Therefore, strong growth is likely to persist through the current year.

A key reason is that China’s EV sales could reach 1.8 million units in 2021, up 40% from the previous year, according to Xu Haidong, the deputy chief engineer of China Association of Automobile Manufacturers (CAAM).

Besides the industry tailwinds, Li Auto has been aggressively expanding its retail footprint. The company currently has 52 retail stores in 41 cities. As its retail presence expands and the number of servicing centers increases, growth will remain strong.

Li Auto currently has just one model and sales have accelerated significantly through FY2020. In FY2022, the company plans to offer a second full-size premium SUV. This is another growth trigger for the company beyond the current year.

From a long-term perspective, the company announced the establishment of a new R&D center in Shanghai. The R&D will be focused on areas like autonomous driving, ultra-fast charging technology, among others.

According to Bloomberg, there will be over 500 different models available by FY2022. While the global market is big enough to absorb several players, technological advancement is likely to be a differentiating factor. Therefore, the 2,000 member R&D center will deliver positive results in the coming years.

Analysts Weigh In

Looking at the consensus breakdown, 5 Buys and 2 Holds have been assigned in the last three months. So, LI is a Moderate Buy. At $43.36, the average analyst price target implies 59% upside potential. (See Li Auto stock analysis on TipRanks)

Concluding Views On LI Stock

Li stock touched an all-time high of $47.70 in November 2020. After a steep correction, the stock has been in a consolidation zone.

With strong Q4 2020 results, a renewed rally seems imminent. Moreover, continued growth in vehicle deliveries, potential operating level profits and strong free cash flows are stock upside triggers.

Disclosure: On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.