Li Auto’s Delivery Momentum Shows No Signs Of Slowing. Is The Stock Undervalued At $36?

LI: Li Auto logo
LI
Li Auto

Chinese luxury electric vehicle maker Li Auto stock (NASDAQ:LI) had a strong November, delivering a record 41,030 units, up roughly 2.7x versus last year. The number was also marginally up from the 40,422 vehicles that the company delivered in October.  Li is seeing robust demand for its three SUVs, namely the Li L9, Li L7, and Li L8 which all combine gasoline generators with batteries to extend the range of EVs and reduce range anxiety. All three vehicles are relatively premium offerings, priced at above RMB 300,000 ($42,000). Cumulative deliveries of Li Auto vehicles in 2023 reached 325,677 as of the end of last month, an increase of 191% versus last year.  XPeng also fared well in November, selling a record 20,041 units, up 2.4x from November 2022. Nio (NYSE:NIO) delivered 15,959 vehicles for November, marking an increase of 12% from November 2022.

Now, amid the current backdrop, LI stock has witnessed gains of 15% from levels of $30 in early January 2021 to around $35 now, vs. an increase of about 25% for the S&P 500 over this roughly 3-year period. However, the increase in LI stock has been far from consistent. Returns for the stock were 11% in 2021, -36% in 2022, and 78% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 20% in 2023 (YTD) – indicating that LI underperformed the S&P in 2021 and 2022. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks.

In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could LI face a similar situation as it did in 2021 and 2022 and underperform the S&P over the next 12 months – or will it see a strong jump?

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There are concerns about global EV demand, with most mainstream automakers, including Volkswagen, Mercedes, Ford, and GM indicating a softer-than-expected uptake. Automotive chip suppliers have also indicated weaker-than-expected uptake for automotive semiconductors for Q4 2023. However, demand doesn’t appear to be an issue at the moment in China, with overall automotive sales rising by 10% for October, with battery electric vehicles accounting for close to 26% of total automotive sales.

Now competition is mounting and this has resulted in considerable price wars. But, Li’s highly differentiated vehicles appear to be giving it an edge in the market. Unlike rivals who have seen margin compression in recent quarters, Li’s margins have been improving. For Q3, Li posted gross margins of 22%, compared with 12.7% in Q3 of 2022 and 21.8% in Q2 2023. Li Auto is looking to bolster its sales further in December, targeting 50,000 monthly deliveries, given that it has sufficient production capacity.  Li trades at about $36 per share, about 20% off all-time highs seen recently. In relative terms, the stock presently trades at 2.9x estimated 2023 revenues. Although this is ahead of Chinese rival Nio, it is below the likes of Tesla and Xpeng. Considering Li’s superior growth and recent profitability, this is not an expensive multiple. See our analysis of Nio, Xpeng & Li Auto: How Do Chinese EV Stocks Compare? for a detailed look at how Li Auto stock compares with its rivals Nio and Xpeng.

Returns Dec 2023
MTD [1]
2023
YTD [1]
2017-23
Total [2]
 LI Return -2% 78% 26%
 S&P 500 Return 1% 20% 105%
 Trefis Reinforced Value Portfolio 2% 31% 570%

[1] Month-to-date and year-to-date as of 12/3/2023
[2] Cumulative total returns since the end of 2016

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