Li Auto: A Silent Killer in the Chinese EV Market

© Reuters. Li Auto: A Silent Killer in the Chinese EV Market

According to UBS forecast, electric vehicles will account for three out of five new cars on China’s roads by 2030.

It’s therefore not surprising that Chinese electric vehicle stocks have been in the limelight.  However, companies like Nio (NYSE:NIO) and XPeng (XPEV) seem to be among the names that are more discussed.

Li Auto (LI) stock, which has trended higher by 88% in the last 12-months, is another attractive name that seems to be flying under the radar.

The company has been on a high-growth trajectory. Considering the factor that the electric vehicle industry is at an inflection point, strong growth is likely to sustain for Li Auto. I am bullish on the stock, with the industry having multi-year tailwinds. (See Li Auto stock charts on TipRanks)

Strong Financial Development

For Q2 2021, Li Auto reported vehicle deliveries of 17,575. On a year-on-year basis, deliveries were higher by 166.1%. Even on a quarter-on-quarter basis, the company’s vehicle delivery growth has been robust.

In terms of key numbers, there are two important points to note.

First and foremost, the company reported vehicle margin of 18.7% for Q2 2021. Margins expanded by 500 basis points on a year-on-year basis. For the comparable period, gross margin also expanded by 560 basis points. With sustained growth in vehicle deliveries, the company seems positioned for further margin expansion.

Furthermore, for Q2 2021, Li Auto reported operating and free cash flow of $218 million and $152.1 million. The company is already generating healthy free cash flows that will add to the financial flexibility.

Key Growth Catalysts

An important point to note is that Li Auto reported cash and equivalents of $5.66 billion as of Q2 2021. This positions the company for aggressive growth in the next 12-24 months.

In terms of specific growth catalysts, the company reported 52 retail stores in 41 cities as of December 2020. As of June 2021, the company’s retail presence expanded to 97 locations in 64 cities. Clearly, Li Auto has been aggressive in expanding the brand visibility. With ample cash, expansion is likely to continue. This is one factor that’s likely to ensure sustained growth in vehicle deliveries.

It’s worth noting that the company’s premium smart electric SUV, Li ONE, was launched in November 2019. Until now, the company’s vehicle delivery growth has been entirely driven by one model. In 2021, the company has launched a new version of Li ONE with improvements in the powertrain system and driving assistance.

However, in the coming quarters, the launch of a new model seems due. As the company broadens its product portfolio in the next few years, vehicle deliveries are likely to remain strong.

Chinese electric vehicle makers have also been pursuing international expansion. XPeng already has presence in Norway, and Nio also has plans for entry into Europe later this year. It would not be surprising if Li Auto were to also pursue expansion in international markets.

Furthermore, Li Auto has been significantly investing in research and development. The company is focused on HPC BEV technologies, intelligent vehicles and autonomous driving. These investments are likely to help Li Auto remain competitive and position itself as an attractive player in the international markets.

Wall Street’s Take

According to TipRanks’ analyst rating consensus, LI stock comes in as a Strong Buy, with four Buys and one Hold assigned in the past three months.

The average LI price target is $38.00 per share, implying 28.47% upside potential from current levels.

Concluding Views

Li Auto is already investing in the reconstruction and expansion project of an automobile manufacturing plant. This is in-line with the company’s deliveries growth visibility.

For Q3 2021, the company has guided for healthy vehicle deliveries of 25,000 to 26,000. With the company already free cash flow positive, LI stock looks like a long-term value creator.

Disclosure: At the time of publication, Faisal Humayun did not have a position in any of the securities mentioned in this article.

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