Li Auto (NASDAQ:LI) has emerged as a frontrunner in China’s new energy vehicle (NEV) market, outpacing its peers and strengthening margins despite price pressures from the likes of Tesla (NASDAQ:TSLA), and it looks like the best is yet to come. The company has beaten several of its China-based peers to profitability, and its positioning in the plug-in hybrid electric vehicle (PHEV) market has allowed it to gain considerable market share with a premium product.
And while I understand that Chinese NEV stocks will likely never trade at the valuation multiples of U.S.-based manufacturers, I’m still bullish on Li Auto.
Strong Growth Trajectory
In December 2023, Li Auto delivered an impressive 50,353 vehicles, marking a stellar 137.1% year-over-year increase and the first time that monthly deliveries had surpassed the half-century mark. Deliveries dipped sequentially in January to 31,165, but that was up 105.8% over 12 months, and 20,251 in February – up 21.8% over last year. It’s too soon to suggest, as some commentators have, that sales are slowing in China due to the timing of the Spring Festival in February.
Li Auto’s growth trajectory in 2023 was remarkable. Quarter by quarter, the company consistently outperformed its peers and beat expectations. In the fourth quarter alone, deliveries reached 131,805, reflecting a substantial 184.6% year-over-year surge. The full-year figure for 2023 stood at 376,030 vehicles, a remarkable 182.2% year-over-year surge. These numbers are particularly robust, given the competitive nature of the market in China.
Comparatively, industry peer NIO (NYSE:NIO) reported 18,012 vehicle deliveries in December 2023, a 13.9% year-over-year increase. For the full year, NIO delivered 160,038 vehicles, showing 30.7% year-over-year growth. While NIO’s growth might be impressive in another context, Li Auto’s delivery figures are far better, showcasing the success of its strategy, its capacity to scale, and its growing market influence.
An NEV Winner
Li Auto’s success, notably relative to peers like NIO, stems from the reception and adoption of its extended-range electric vehicles (EREVs), a subset of PHEVs. EREVs have gained popularity for several reasons, including range anxiety in battery electric vehicles (BEVs) like Teslas and NIOs, and serving as something of bridge for the electrification transition.
Li has three EREVs for sale—the Li L7, Li L8, and Li L9—and recently launched its first BEV—the MEGA MPV (multi-purpose vehicle)—utilizing improved battery technology. Despite premium pricing, Li Auto’s L8 and L9 were China’s 13th and 16th best-selling NEVs in February.
Li Auto intends to bring four new models to market in 2024 (a mix of EREV SUVs and BEVs), but the move into the BEV space is an interesting one, given its success in the EREV space. However, it seems to be a transition that’s going to plan. The MEGA achieved 10,000 pre-orders within two hours of debuting despite its hefty $72,000 price tag. With a claimed CLTC (China Light-Duty Vehicle Test Cycle) range of 720km and 12-minute charging capability, the MEGA certainly demonstrates some of the advances in BEV technology.
From a financial perspective, Li is China’s NEV winner. It’s the first company to turn a profit among its peer group, which includes NIO and Xpeng (NYSE:XPEV), registering earnings per share of $1.56 in 2023 and $0.75 in Q4.
Revenues for the last quarter amounted to an impressive $5.88 billion from 131,805 units delivered. Moreover, Li’s margins actually improved despite pricing pressure from peers. Its vehicle margin was 22.7% in the fourth quarter of 2023 compared with 20.0% in the fourth quarter of 2022 and 21.2% in the third quarter of 2023.
Is Li Auto Stock a Buy, According to Analysts?
Li Auto is rated a Strong Buy, according to analysts, with 10 Buy ratings, zero Hold ratings, and zero Sell ratings. The average Li Auto stock price target is $56.71, inferring 42.8% upside from the current share price.
The Bottom Line on LI Stock
As Li is one of just a few NEV stocks to have turned a profit, there are limited companies available for comparison as benchmarks. However, having given back some of its gains in recent weeks, the NEV pioneer is now trading at just 16.6x non-GAAP forward earnings. That looks like exceptionally good value when we consider that Tesla is trading at 55.7x forward earnings.
While I appreciate that Chinese companies, given the broader economic context, will rarely trade at the same multiples as their American peers, I believe the discount here is impossible to ignore.
Finally, the most attractive part of Li’s valuation is its price-to-earnings-to-growth (PEG) ratio, which sits at 0.86x. In the current market, it’s hard to find companies with PEG ratios under one, and that’s why Li Auto stock is a Strong Buy for me.
