Li Auto: A Potentially Underappreciated Winner In China's EV Adoption

seekingalpha2021-04-22

Summary As China pushes for more EV adoption, Li looks to be an attractive long-term hold at the current valuation. Profitability and positioning closest to annual profitability after posting a 2.8% ...

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Comments

暴风里的鸡蛋壳
2021-04-23
暴风里的鸡蛋壳
三傻必有一死
DukeAlan
2021-04-22
DukeAlan
Nice.
cjp1987
2021-04-22
cjp1987
Thanks for sharing
fongj
2021-04-22
fongj
Hybrid vehicle is the bridge in the meantime before better milage is achieved by fully electrical vehicle.
StanleyPoh
2021-04-22
StanleyPoh
Good
handee
2021-04-22
handee
EV good

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The overall EV industry has yet to consolidate as significant expected growth has brought many new entrants to the market. A handful of names stand out as solid choices to capture such growth, especially in China, which has been touted as one of the largest and fastest growing markets for EV in particular. In terms of the main three startups, Li Auto's (LI) positioning closer to annual profitability with a \"cheaper\" valuation compared to NIO (NIO) and XPeng (XPEV) reaffirms a positive outlook with a valuation safety net.\nDeliveries Forecast\nLi followed in the footsteps of NIO and XPeng, bouncing back off weak February deliveries due to the New Year holiday and some outbreaks in the northern regions. Deliveries for Q1 rose to 12,579 units, as March deliveries rose to 4,900, +239% y/y. Although both the month and the quarter showed significant y/y growth, sequentially, deliveries did not fare as well. Q1's figure represented an 1,885 unit decline, -13% q/q, due to February impacts as well as below-average March sales, likely as a result of the chip shortage impacting the industry.\nSimilar to NIO, Li could see some persistence of the chip headwind through Q2, and April's delivery numbers announced in a week and a half's time will bring light to the true scale of the impact to deliveries. With some near-term impacts ahead of strong seasonality trends in 2H, Li could see deliveries for FY21 reach 65,000 units, +99% y/y. Given China's projected units of 1.8 million in the overall EV market, Li would have about 3.6% share this year; with some of the sequential declines such as from December to January due to seasonality, Li's market share per month in NEV has taken some impacts due to quicker growth from GM (GM) and Wuling's Hongguang, BYD (OTCPK:BYDDY), and Tesla. In PHEV, Li remains a key player, commanding just over 13% share of deliveries.\nData from CAAM\nEven amid competition from BYD's Tang PHEV, Tang 600/600D, NIO's ES8, and Tesla's Model Y in the SUV/compact SUV segment, the Li ONE does have certain technological advantages (like an autonomous partnership with NVIDIA's (NVDA) Huizhou Desay) at a median price point of RMB328,000.High safety scores and an under-construction R&D center for \"high-voltage platforms, ultra-fast charging technologies, autonomous driving technologies, next generation intelligent cockpits, operating systems and computing platforms\" could serve as differentiators and drivers for deliveries in this price segment.\nRevenues, Profitability and Valuation\nWith a stronger seasonality forecast in 2H elevating sales near the projected figure of 65,000 units, Li could see revenues rise to RMB17.5-18.5 billion (US$2.7-2.85 billion). An uptick in services revenues could add an extra RMB300-700 million in revenues, a small addition but an addition nonetheless. Under these revenue projections, Li trades at approximately 6.3x FY21 revenues, and approximately 3.2x FY22 revenues of US$5.25 billion. Compared to peers, it's quite a lower valuation:XPeng trades at 11.9x FY21 revenues and 5.4x FY22, while NIO trades at 12.0x FY21 revenues and 6.3x FY22.\nNIO and XPeng trade at similar multiples, while Li trades below - this likely comes down to placement within the EV market. Li focuses on EREV, a form of PHEV, while NIO and XPeng are pure BEV. NIO earns a slight premium from being the leader in terms of deliveries and revenues of the three, while XPeng's multiples are similarly high due to technological lead and European expansion. Li is the first to reach profitability, posting a 2.8% net margin for Q4, which attests to the ability of the manufacturer to scale at cost efficiently, and consistently achieve breakeven (or minimal loss) quarters for the next twelve months.\nUnlike the other two, Li does not spend a ridiculous amount on R&D, thus aiding a superior margin profile; total operating expenses were just 19.4% of revenues, with R&D not even accounting for half of operating expenses. While Q1 and Q2 could see vehicle margin in the low 16% range, seasonality and higher volumes in 2H could push vehicle margin back up 17%, leaving FY vehicle margin at about 17%. Downside risk to margins remains elevated due to the chip shortage, impact to deliveries in Q1 and Q2, and planned build-out of sales, servicing, and R&D facilities ahead of new models in 2022.\nProjected calculations\nWith this margin profile, Li could post approximately RMB200-300 million (US$31-46 million), or $0.03-0.05 per ADS, in net income for the FY, although operating performance during 1H will be a key factor. However, as deliveries scale higher during 2H and out through FY22 and beyond, maintenance of this margin profile in the high-teens could see Li reach RMB1 billion of net income (US$150 million, $0.15 EPS) by FY23.\nNew Models\nLi touted that it would be expanding its vehicle line by one model per year from 2022 onward, with the current expected lineup sitting at four different vehicle models, with the first one a second EREV SUV with ADAS capabilities, possibly the XO1. Some of the later models could be full BEV as the company works towards transitioning to a full BEV model to comply with government regulations.\nGraphic from CNTechPost\nWhile more details have yet to be announced, the leaked lineup does point to larger SUVs with the X01/X02, and smaller, cheaper SUVs, likely BEVs, with the S01/S02 targeting the Model X/Y.\nLi is continuing to focus on EREV with the second model in 2022 as the country's charging infrastructure is still not at the level that it should be to support an immediate transition to a full BEV environment. Li still has a solid market share in PHEV/EREV, of which it can target with the second model, given that this type of EV is still necessary in the transitory stage from ICE to BEV.\nRisks\nEV manufacturers have shown that risks are quite plentiful, and Li does have risks associated with one of its key advantages - profitability - as well as other factors stemming from the industry.\nThe crowded, ultra-competitive nature of EV, stemming from startups and legacy manufacturers all fighting for market share, elevates delivery growth risk if Li falls behind technologically ahead of a pure BEV launch some years down the road. Growth in micro EV segments has been strong and could be a continuing trend, which could keep Li's market share relative to the overall EV market at sub-3.5%.\nAnother sector risk stems from the chip shortages, since China presents a different chip dynamic. China \"imports the vast majority of the chips used in car production, [and] until Chinese companies build up their own manufacturing capabilities... and speed up development of chips and operating systems,\" it could see risks for multiple years. Manufacturing chips in-house, similar to what XPeng is aiming to do, could significantly increase costs.\nSince Li lags NIO on deliveries and could start to lag XPeng soon due to both having similar full year delivery predictions, its push towards new models will come at a higher cost, one that could impact profitability. Li most likely will be increasing R&D over the coming years to develop the four new models, with R&D spend alone potentially reaching RMB500 million per quarter this year and nearly RMB1 billion per quarter by 2023/24. This could keep operating expense growth on a similar pace as revenue growth, thus limiting EPS growth or a sustained shift to profitability if operating expenses remain 20-25% of revenues.\nTo raise cash for new model production, higher R&D spend for BEV development and other corporate purposes, Li raised US$862.5 million from the fully exercised offering of its 0.25% 2028 convertible notes. NIO and XPeng have shown a tendency to tap into the debt markets before through convertibles, so Li could potentially add more debt to its relatively light balance sheet without harming its financial safety, but such potential additive dilution could have adverse impacts on shares.\nOverall\nOf the three major Chinese startups, Li has the most attractive, \"cheaper\" valuation, but its focus on EREV within the Li ONE and second model in 2022 could force the manufacturer to increase expenses at a cost to its superior margin profile to catch up in the BEV space in 2023 and beyond. Profitability and positioning closest to annual profitability after posting a 2.8% net margin in Q4 '20 is one key differentiator against NIO and XPeng, as the two spend significantly on R&D to fuel expansion and technological innovation. Li could see some near-term headwinds to deliveries and market share from the chip shortage and fast growth from BYD's, Wuling's and Tesla's models, but margin expansion should be possible with strong seasonality in 2H. With deliveries expected to grow significantly this year and continue to rise as China pushes for more EV adoption, Li looks to be an attractive long-term hold at the current valuation.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[{"id":376631091,"gmtCreate":1619107205813,"gmtModify":1704719836089,"author":{"id":"3575044403730346","authorId":"3575044403730346","name":"暴风里的鸡蛋壳","avatar":"https://static.tigerbbs.com/b41dfc8827b17f2442f628bf066fb51e","vip":1,"hat":"https://static.tigerbbs.com/b0a2963eb37c60c5d6d4a8dbcd266952","crmLevel":9,"crmLevelSwitch":1},"htmlText":"三傻必有一死","listText":"三傻必有一死","text":"三傻必有一死","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/376631091","repostId":1162664133,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"CN"},{"id":376893249,"gmtCreate":1619101281781,"gmtModify":1704719685563,"author":{"id":"3578446470950082","authorId":"3578446470950082","name":"DukeAlan","avatar":"https://static.tigerbbs.com/5d8e6962022e3365333d669221455dd6","vip":1,"crmLevel":3,"crmLevelSwitch":0},"htmlText":"Nice.&nbsp;","listText":"Nice.&nbsp;","text":"Nice.","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":1,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/376893249","repostId":1162664133,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":376125950,"gmtCreate":1619099026270,"gmtModify":1704719624284,"author":{"id":"3581835894164183","authorId":"3581835894164183","name":"cjp1987","avatar":"https://static.laohu8.com/default-avatar.jpg","vip":1,"crmLevel":1,"crmLevelSwitch":0},"htmlText":"Thanks for sharing","listText":"Thanks for sharing","text":"Thanks for sharing","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":2,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/376125950","repostId":1162664133,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":376163174,"gmtCreate":1619098276398,"gmtModify":1704719605456,"author":{"id":"3576237822910328","authorId":"3576237822910328","name":"fongj","avatar":"https://static.tigerbbs.com/9ce49c725fb9db07e6d4fad9c0dc7eef","vip":1,"crmLevel":1,"crmLevelSwitch":0},"htmlText":"Hybrid vehicle is the bridge in the meantime before better milage is&nbsp;achieved&nbsp;by fully electrical vehicle.","listText":"Hybrid vehicle is the bridge in the meantime before better milage is&nbsp;achieved&nbsp;by fully electrical vehicle.","text":"Hybrid vehicle is the bridge in the meantime before better milage is achieved by fully electrical vehicle.","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":1,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/376163174","repostId":1162664133,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":376139621,"gmtCreate":1619096361963,"gmtModify":1704719563242,"author":{"id":"3574808114234183","authorId":"3574808114234183","name":"StanleyPoh","avatar":"https://static.tigerbbs.com/c0902fe205579a01761881c3d7f80124","vip":1,"crmLevel":5,"crmLevelSwitch":0},"htmlText":"Good","listText":"Good","text":"Good","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/376139621","repostId":1162664133,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":376198253,"gmtCreate":1619095925172,"gmtModify":1704719554013,"author":{"id":"3567590916259475","authorId":"3567590916259475","name":"handee","avatar":"https://static.tigerbbs.com/a96d69a3ab43a08b0f24f51486d6254c","vip":1,"crmLevel":2,"crmLevelSwitch":0},"htmlText":"EV good&nbsp;","listText":"EV good&nbsp;","text":"EV good","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":2,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/376198253","repostId":1162664133,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"}],"isCommentEnd":false,"newsSizeData":{"likeSize":16,"commentSize":7,"repostSize":0,"favoriteSize":1,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; 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