Deliveries Up 40% But Stock Down — What’s Weighing On Li Auto Stock?

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 51,000 vehicles for July 2024, an increase of 49.4% versus last year. Deliveries for the seven months from January through July are up almost 39% compared to last year. However, the strong delivery performance hasn’t benefited Li’s stock, which remains down by 45% year-to-date.

There are a couple of factors that have driven Li’s growth of late. 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 was launched in April and is priced at about RMB 250,000 (about $34,500), and sold over 20,000 units in July. Li also lowered prices for several of its models a few months ago and this has also likely helped its overall volumes.

That being said, there have been multiple headwinds as well for Li Auto. Li Auto’s Q1 2024 results were weaker than expected with the company witnessing a 36% year-over-year drop in profits on account of mounting competition. The Chinese EV market is extremely crowded, with over 100 brands competing in the space. There has also been an intense price war, with players including Tesla reducing prices for their vehicles multiple times over the past year. Li has seen its average selling prices decline by about 14% year-over-year to about RMB 300,000 as of Q1 2024. While this could be due to a lower mix of premium EV model sales (such as the Li L7, Li L8, and Li L9) and a higher mix of the low-priced L6 model, mounting competition has also impacted the company.

China’s economic growth has been weak with GDP rising by just about 4.7% in the second calendar quarter of 2024, down from 5.3% in the first quarter, as the country faces a downturn in the real estate market and a slow rebound from stringent Covid-19 lockdowns that ended over a year ago. Moreover, consumer spending and domestic consumption also remain weak in China. Retail sales recently fell to an 18-month low due to deflation, as businesses have been cutting prices while employers have been reducing salaries with unemployment among the youth remaining high. The broader high interest rate environment is also hurting automotive companies in general by making financing costs higher.

Separately, entry into new international markets is also proving tricky due to mounting trade barriers. There have been tariff hikes in the European Union, which has accused Chinese EV makers of receiving unfair state subsidies, with additional duties expected to be up to 37.6%. The U.S. has imposed a 100% import duty on Chinese EVs into the country. This is viewed as a negative for Chinese EV players such as Li Auto, as it could limit volume growth.

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 50% 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?

Despite concerns about the economy and weakness in the global EV market, the Chinese EV space is still showing promise. A few months ago, China introduced new incentives of RMB 10,000 (approximately $1,410) for consumers who replace their gasoline cars with electric and low-emission vehicles and there have been reports that this subsidy could be doubled to 20,000 yuan ($2,800) per vehicle. There has also been a premiumization trend in the Chinese EV market, with cars costing upward of $30,000 accounting for a growing mix of sales, at the expense of lower-end EVs. This could play in Li Auto’s favor, as it competes primarily in the premium end of the electric vehicle market. Li’s valuation is also fair, with the stock trading 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 per consensus estimates. 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.

[1] Returns as of 8/17/2024
[2] Cumulative total returns since the end of 2016

Invest with Trefis Market-Beating Portfolios
See all Trefis Price Estimates