Expecting Significant Wealth Creation From Li Stock In The Long Term

seekingalpha08-20

Initiating coverage on Li Auto with a "Buy" rating, an undervalued stock with the potential to navigate challenges in the EV industry.Li stock plunged due to revised delivery guidance, margin ...

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06:32 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4715724-expecting-significant-wealth-creation-li-stock-in-long-term><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Initiating coverage on Li Auto with a \"Buy\" rating, an undervalued stock with the potential to navigate challenges in the EV industry.Li stock plunged due to revised delivery guidance, margin ...</p>\n\n<a href=\"https://seekingalpha.com/article/4715724-expecting-significant-wealth-creation-li-stock-in-long-term\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"BYDDF","symbol_name":"BYD Co., 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INC"},"translate_title":"预计Li股票长期将创造大量财富","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"XPNGF":1,"LI":1,"LAAOF":1,"GELYF":1,"BYDDF":1,"EVS.SI":0.6},"content_text":"Initiating coverage on Li Auto with a \"Buy\" rating, an undervalued stock with the potential to navigate challenges in the EV industry.Li stock plunged due to revised delivery guidance, margin compression, and negative sentiments for Chinese stocks, but was oversold and poised for recovery.A strong balance sheet with a cash buffer of $13.7 billion and positive operating cash flows since 2020.Investment in autonomous driving technology is likely to ensure that Li stays ahead of the curve.   Robert Way Initiating Coverage I am initiating coverage on Li Auto (NASDAQ:LI) (OTCPK:LAAOF) stock with a “Buy” rating and an initial investment horizon of 36 months. I believe that Li stock is undervalued even after discounting the challenges for the electric vehicle industry. I further believe that Li Auto is among the EV companies that’s positioned to navigate challenging times and emerge stronger. This initiated coverage discusses the industry and company-specific factors to be bullish. Besides balance sheet fundamentals, the coverage discusses the business and technology factors that set Li Auto apart from peers. In relatively volatile market conditions, it’s difficult to talk about targets. I, however, believe that Li stock has limited downside, but a significant upside potential from current levels of $20.5. My view is underscored by the point that Li stock trades at a forward P/E of 17.5. This is inexpensive for a growth stock, even after factoring in industry headwinds. I will further elaborate on the valuation later in the thesis. Why Li Stock Plunged After Making New Highs? There has been ample price-action in Li stock in 2024. On January 22, the Chinese EV stock was trading at $27.45. In just over a month, the stock traded at closing highs of $46.2. The rally was sharp, but short-lived. Currently, Li stock trades at $20.5. Before talking about the positives, let’s look at the reasons that induced a sharp correction. Between March and August, the following factors have depressed sentiments for Li stock. First, Li Auto revised its deliveries' guidance for 2024 on the back of macroeconomic headwinds and intense competition. The revision in the growth outlook implied a deceleration in sales momentum. Second, when Li Auto reported Q1 2024 results, there was a compression in vehicle margin on a year-on-year and quarter-on-quarter basis. Of course, vehicle margins remained healthy, but the markets have discounted the impact of competition. Third, Li stock sentiment was also impacted by negative sentiments for Chinese stocks. This was on account of geopolitical factors coupled with the negative impact of tariffs. Without doubt, these are fundamental factors that will impact valuations. However, it’s well known through the history of financial markets that reactions tend to be on the extremes. It’s no different this time and Li stock is oversold. I will revisit these factors later in the thesis, along with mitigants to these risks. Good Management and Business Execution Positive industry tailwinds are not the only condition for success. There are companies in a high-growth industry that underperform. The differentiating factor is management and the business execution. The performance of Li Auto has been commendable on that front. It was in November 2019 that Li Auto commenced volume production. It’s therefore been less than five years of operating history, but Li Auto has plenty to show in terms of performance. As of July 2024, the company’s cumulative deliveries reached 873,345 vehicles, “ranking first among China’s emerging new energy auto brands.” Further, as of May 2024, the company’s market share in RMB200,000 and higher NEV market increased to 13.5%. Clearly, these are big achievements within the first five years and underscores my view on the management and business execution capabilities. When the management updated its Q1 2024 outlook, they also acknowledged mistakes. First, the management opined that the “operating strategy of Li MEGA was misplaced.” Further, it was acknowledged that the company “put excessive emphasis on sales volume and competition” and this distracted them from the core competence of “creating value for our users and driving operating efficiency.” Acknowledging the potential mistakes and working towards rectification is a sign of a good management. Of course, as Li Auto lowered its growth expectations, the markets reacted negatively. However, focusing on core competencies and delivering value is better than working in-sync with market expectations. Laser Sharp Focus on China In five years of operating history, Li Auto has refrained from making any international investments. Peers like NIO (NIO) and XPeng (XPEV) (OTCPK:XPNGF) have pursued aggressive expansion in the European markets. However, Li Auto has continued to focus exclusively on China. In my view, this is another sign of a good management. When the addressable market is big, it makes sense to build in one market, rather than look for regional diversification that translates into cost escalation. Talking about the Chinese markets, passenger car sales reached 1.595 million in July 2024. Of this, 853,000 units were NEVs. Therefore, NEVs are already over 50% of total car sales. It’s also worth noting that Li Auto was in the third place, with BYD Company (OTCPK:BYDDF) and Geely Automobile (OTCPK:GELYF) occupying the first two places. Clearly, the strategy of focusing on one market has worked, and Li Auto continues to aggressively expand its retail network. As of July, the EV company had 487 retail stores in 146 cities. I will come back to the point on tariffs on EVs from China in Europe and the United States. While the news depressed sentiments for Chinese EV companies, LI Auto is currently immune to the tariff impact. Of course, international expansion is likely, but there are other attractive markets that will be in focus if the tariff headwind sustains. Unconfirmed reports suggest that Li Auto might be planning an international expansion in 2025 with the Middle East being the target market. Chinese EV companies have been making significant inroads in the Southeast Asian markets. That might be another potential target for Li Auto. Strong Fundamentals Will Support Investment in Innovation Another factor that sets Li Auto apart is strong fundamentals. This gives the company high flexibility for aggressive retail expansion, investment in product development, and innovation. As of Q1 2024, Li Auto reported cash and equivalents of $13.7 billion. Further, for the last financial year, Li Auto reported operating cash flow of $7.1 billion. As a matter of fact, the company has been reporting positive operating cash flow since 2020. With pricing pressure, I expect operating, and free cash flows to be relatively depressed. However, free cash flow is likely to remain positive and will boost the financial flexibility. Even in challenging times for the industry, Li Auto is unlikely to face any credit stress. On the contrary, I expect strong investments in research and development to sustain. In July, Li Auto unveiled its end-to-end autonomous driving architecture. Cathie Wood believes that the autonomous taxi ecosystem is an $8 to $10 trillion global revenue opportunity. The focus on this segment is therefore likely to create immense value for Li Auto in the long term. Revenue Growth Likely to Remain Robust Li Auto has witnessed deliveries and revenue growth deceleration. That was coming on the back of macroeconomic headwinds and pricing pressure. However, there are two important points to note. First, Li stock has already discounted the slower growth and margin compression factor in the recent correction. Further, even with relatively subdued growth, Li Auto reported a revenue upside of 32.3% in Q1 2024 on a year-on-year basis. For Q2 2024, deliveries have increased by 25.5% on a YoY basis to 108,581. Growth therefore remains healthy, and I expect renewed growth acceleration in the next 12 to 24 months. My view on potential growth acceleration is underscored by the following factors. First, the world is moving towards expansionary monetary policies as GDP growth decelerates. Multiple rate cuts in the next 24 months will translate into lower cost of money and support leveraged consumption spending. Second, in July, battery-only makers reported lower vehicle deliveries as compared to makers of hybrid-powered cars. This gives Li Auto an edge, with the recently launched Li MEGA being the first BEV. The company has a strong portfolio of hybrid-powered cards and the new, lower-cost Li L6 SUV, will continue to boost delivery growth. Third, it’s being speculated that Li Auto will enter international markets next year. A potential expansion in the Middle-East or Southeast Asia is likely to support delivery growth. Of course, with high financial flexibility, the continued launch of new cars with upgraded technology features will support growth. The near-term headwinds therefore present a good buying opportunity. Risk Factors Li Auto’s strategy of focusing exclusively on China has delivered good results. However, it’s worth noting that competition remains intense. Estimates indicate that the country has more than 200 EV manufacturers. Operating in a single market with high competition is a risk. Having said that, Li Auto has strong fundamentals and is ranked among the top three players. With continued investment in R&D, the company is likely to stay ahead of the curve. In March 2024, Tesla (TSLA) talked about a new unboxed manufacturing process that could cut costs by half. Besides focusing on technology, EV companies are increasingly looking at low-cost models. Competition in the low-cost segment must be countered with EVs having a similar pricing. I therefore believe that Li Auto’s vehicle margin of around 20% might not be sustainable in the next few years. However, volume growth and operational efficiency is likely to translate into healthy cash flows. Concluding Views Li Auto's stock has all the ingredients to be a value creator. Even with relatively slow adoption, the EV industry has seen tailwinds through the decade. Further, Li Auto has strong fundamentals, a good management, and has established a strong presence in China. With a focus on autonomous driving technology, Li Auto is likely to remain ahead of the curve. I like the management approach of going slow when it comes to international expansion. In challenging times, the company has conserved cash. When sentiments reverse, I expect aggressive investments to boost growth. Finally, on valuations, Li stock trades at a forward P/E of 17.5. Even if growth is in the range of 20% to 25%, a PEG ratio of less than 1 indicates undervaluation. It’s worth mentioning here that of 43 analyst ratings, the bearish price forecast is $17.94. This would imply a downside of $12.5% from current levels.  On the other hand, the bullish price estimate is $51.91 and would imply an upside potential of 153.2% from current levels. Clearly, the downside is capped, and the upside potential is significant for Li stock. In my view, gradual accumulation can be considered in the next few quarters.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"1","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.26.4","shortVersion":"4.26.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2460093300"}