To The Moon

Summary

• Li has delivered a record 86,533 vehicles and realized $4 billion in revenue in Q2 2023.

• Li is currently the third biggest Chinese EV maker in terms of deliveries, behind EV giant BYD and Aion.

• Li expects to deliver 100,000 vehicles in Q3, which it is on track to achieve with its record July deliveries of 34,134.

• I believe Li is a better investment in the EV sector than other Chinese manufacturers like Nio and XPeng.

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Thesis

Li Auto Inc. $Li Auto(LI)$ seems to be on a roll recently. The EV maker has recorded its third consecutive quarter of profitability and has increased its gross margin sequentially from 20% to around 21.7%. Additionally, the EV maker has achieved record deliveries in Q2 for the third consecutive time and expects to break it again in Q3 after achieving record monthly deliveries in July. When it comes to deliveries, LI has surpassed the likes of Nio $NIO Inc.(NIO)$, and Hozon, and is currently the third largest Chinese EV company in terms of deliveries. As is, the company’s deliveries are only surpassed by BYD $BYD Co., Ltd.(BYDDF)$ and Aion(2238.HK).

That said, I expect Li will exceed analysts’ Q3 revenue and EPS estimates of $4.537 billion and $0.31 respectively due to its deliveries growth. Given the aforementioned information, Li is a great stock to own in both the short and long terms which is why I’m giving it a strong buy rating.

Li Financials and Q2 Results

Looking at Li’s Q2 balance sheet, we can see that the EV manufacturer has increased its cash and cash equivalents to $8 billion, while decreasing its short-term investments to $1.5 billion, which will probably impact its interest income in Q3. But it is obvious that the EV maker is in a good financial position, especially since it has positive cash flow, which means that it can use the cash on hand to expand and scale its production further.

Q2 Earnings

The Chinese manufacturer has also achieved record revenue of $4 billion, which compliments its record quarterly deliveries in Q2. It also saw sequential improvements in its gross margin that can probably be attributed to its efforts to scaling production in Q2. Moreover, it has achieved its third consecutive quarter of profitability, which is extremely significant since other Chinese EV startups like Nio and XPeng $XPeng Inc.(XPEV)$ have extremely low margins and are yet to achieve profitability in a single quarter since their inception.

Q1 Earnings

Li’s Delivery Growth

Li has seen impressive growth in its deliveries during the last few quarters, so much so that its deliveries in the first two quarters of 2023 surpassed its deliveries for the entirety of 2022.

In contrast, Nio and XPeng struggled to ramp up their production at the start of 2023 due to supply chain issues.

Monthly delivery press release

In this way, Li has cemented itself as the third largest Chinese EV manufacturer in terms of deliveries since it delivered 173,251 vehicles in 2023, more than double of both Nio’s and Hozon’s deliveries.

Monthly/quarterly delivery press releases

In my opinion, Li could have a shot at surpassing Aion and becoming the second largest Chinese EV manufacturer if it used its cash balance to improve its production, but that will probably take some time since its management expects to reach 40,000 deliveries per month in Q4 2023.

On the other hand, Aion has already surpassed 40,000 deliveries and is currently in the middle of a delivery streak as it consistently delivered around 45,000 vehicles for the past three months. That said, Li still expects to break 100,000 deliveries in Q3, which means it could be on track to reach its initial delivery target of 360,000 deliveries in 2023 after management downgraded its target to 300,000 deliveries earlier this year.

Furthermore, the Chinese Ministry of Finance has stated that all NEV purchases in 2024 and 2025 will be exempt from purchase tax up to RMB 30,000 ($4,170), with the exemption being halved and capped at RMB 15,000 for purchases made in 2026 and 2027. The tax exemption will see demand for NEVs increase even more in the ever-growing Chinese EV market, which has seen 55% growth in 2022. These tax exemptions, even if not exclusive to Li, will probably increase demand for EVs in general and for Li specifically due to its position as the third largest Chinese EV manufacturer.

Global EV sales growth, EV Volumes

Q3 Forecast

Since Li expects to deliver between 100,000 and 103,000, we can use that to project its revenues and EPS for Q3.

Li’s revenue per delivery and cost per delivery were around $46,000 and $36,000 respectively in Q2 2023. While the cost per delivery should decline in Q3 due to the increase in scale, I’m going to use Q2 numbers for the sake of simplicity. Using the midpoint of the management delivery forecast, the company’s revenue projection would be around $4.7 billion and its cost of revenue projection around $3.65 billion. These figures indicate that Li’s gross profit projection should be around $1.015 billion, or a 21.74% gross margin.

As for the operating expenses, if we assume that Li maintained its YoY growth of 48.92%, its operating expenses projection in Q3 would be $693.23 million. Since the EV maker cut its short-term investment by 43%, we can project its interest income to decline from $60 million to $34 million. Adding all of this up would put Li’s net income projection at $358 million or an EPS of $0.37, exceeding analysts' EPS estimates of $0.30.

Risks

While Li is currently ahead of XPeng and Nio in almost every aspect, both companies have received new investments recently, with Nio receiving $738 million from Abu Dhabi owned CYVN Holdings and XPeng receiving an $800 million investment from Volkswagen $Volkswagen AG(VWAGY)$. Both of these investments may be the start of a long-term relationship, which could see both manufacturers improve their production and delivery numbers and, in turn, take a slice of Li’s market share.

Conclusion

Li is currently far ahead of other Chinese EV startups. The company just achieved its third consecutive quarter of profitability and has achieved quarterly record deliveries in Q2. Furthermore, it achieved monthly record deliveries in July, which puts it on track to achieve its initial 2023 delivery target of 360,000 vehicles. Li is also the third biggest Chinese EV manufacturer in terms of deliveries and may surpass Aion in the next couple of years to be the second biggest Chinese EV manufacturer if it continues its rapid growth. As is, I expect the Chinese EV maker to beat analysts’ estimates for revenue and EPS. For these reasons, I can’t rate Li as anything but a strong buy.

Source: Seeking Alpha