Li Auto Grows Despite China’s Economic Struggles. Can The Stock Recover?

Li Auto (NASDAQ:LI), the largest of the emerging EV players in China, delivered 48,122 vehicles for July 2024 – an increase of 38% percent year-over-year, although they were down by 5.6% versus July. Deliveries for the eight months from January through July are up almost 39% compared to last year at 288,103 units. Growth is being driven primarily by the Li L6, the most affordable model in the company’s lineup, which has gained popularity among younger consumers, with deliveries surpassing 20,000 units for the third consecutive month. The vehicle, which was launched in April, is priced at about RMB 250,000 (~$34,500). Li also lowered prices for several of its models a few months ago and this has also likely helped support sales to an extent.

However, Li stock remains down by about 47% year-to-date. There have been multiple headwinds for Li Auto. While Li Auto’s Q2 2024 results were slightly better than expected, Li’s profitability and average selling prices per vehicle are faltering due to mounting competition. The Chinese EV market is extremely crowded, with over 100 brands competing in the space.  Li is also likely seeing 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. Li has seen its average selling prices decline by about 13% year-over-year to about RMB 280,000 during the most recent quarter. Li Auto’s gross margin stood at 19.5% in Q2, down from 21.8% in the year-ago quarter.

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.

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 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 RMB 20,000 ($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. In Q2, the company indicated that its market share in the new energy vehicle space for vehicles priced at over  RMB 200,000 and higher expanded to 14.4%.

Li’s valuation is also fair, with the stock trading at just under $20 per share – a little over 14x estimated 2024 earnings and roughly 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 9/1/2024
[2] Cumulative total returns since the end of 2016

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