Down 50% This Year, Will Improving Deliveries Drive Li Auto Stock Higher?

LI: Li Auto logo
Li Auto

Things appear to be getting better in the Chinese luxury electric vehicle market. Li Auto (NASDAQ:LI) , which is the largest of the emerging EV players in China, delivered 47,774 vehicles for June 2024, an increase of 46.7% compared to last year. There are a couple of factors that drove Li’s growth. Firstly, the company is seeing stronger demand for its new lower-priced Li L6 model for which it has ramped up production. The vehicle, which is priced at about RMB 250,000 (about $34,400) sold about 20,000 units in June, accounting for about 40% of total unit sales. Li also lowered prices for several of its models earlier in the quarter and this also likely helped volumes. However, the company’s other electric vehicle models including the Li L7, Li L8, and Li L9 are likely to have seen growth cool off a bit. In comparison, rival Nio (NYSE: NIO) delivered 21,209 vehicles, a 98% year-over-year increase, driven in part by changes it made to its EV battery rental service in March, while Xpeng (NYSE: XPEV) delivered 10,668 EVs, representing a 24% increase year-over-year.

Now LI stock has suffered a sharp decline of 35% from levels of $30 in early January 2021 to around $20 now, vs. an increase of about 45% for the S&P 500 over this roughly 3-year period. However, the decrease in LI stock has been far from consistent. Returns for the stock were 11% in 2021, -36% in 2022, and 83% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – 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; for heavyweights in the Consumer Discretionary sector including AMZN, TSLA, and HD, and even for the mega-cap stars GOOG, MSFT, and AAPL.

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 recovery?

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Now there are concerns regarding global EV demand, with many mainstream automakers seeing cooling demand and consequently scaling back on their EV investment plans. However, the Chinese EV market is still showing some promising signs. A few months ago, China introduced new incentives of RMB 10,000 (approximately $1,410) for consumers who trade in their older gasoline cars for electric and low-emission vehicles by the end of the year. There has also been a trend of premiumization in the Chinese EV market, with cars costing upwards of $30,000 accounting for a rising mix of sales, at the expense of lower-end EVs. This could play in Li Auto’s favor, as it competes exclusively in the premium end of the market. Moreover, with the EV space getting more crowded, the company could also have an edge over the competition due to its more differentiated products, which feature a gasoline-powered range-extending generator that can recharge batteries on the go. Now, Li stock trades at about $18 per share, about 14x consensus 2024 earnings and 10x 2025 earnings, which is not very expensive considering that the company’s revenues are projected to grow by over 15% this year and by over 35% next year. See our analysis of Nio, Xpeng & Li Auto: How Do Chinese EV Stocks Compare? for a detailed look at how Li stock compares with its rivals Nio and Xpeng.

Returns Jul 2024
MTD [1]
YTD [1]
Total [2]
 LI Return 0% -52% -38%
 S&P 500 Return 0% 14% 144%
 Trefis Reinforced Value Portfolio 0% 6% 655%

[1] Returns as of 7/1/2024
[2] Cumulative total returns since the end of 2016

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