Rising Tariffs And Strict Regulations Will Curtail EV Expansion

Key Takeaways

• Geopolitical tensions, regulatory hurdles, and reliance on the Chinese market threaten future growth, margin stability, and international expansion prospects.
  
• Intensifying competition and the critical need to shift to full electrification create risks of lower prices, higher costs, and potential technological obsolescence.
  
• Aggressive investment in technology, diversified products, network expansion, and internationalization positions Li Auto for stronger market share, revenue growth, and margin improvement.

Catalysts

Operates in the energy vehicle market in the People’s Republic of China.

• Despite strong recent deliveries and a broad product launch pipeline, Li Auto faces intensifying global trade tensions and the real risk of new tariffs or export restrictions on Chinese vehicles, which could severely limit its ability to expand overseas, stalling future revenue growth and reducing international diversification opportunities.
  
• Although the company touts its advancements in AI, autonomous driving, and battery technology, the sharply rising investment required to comply with stricter environmental and regulatory standards both in China and globally is likely to place sustained pressure on net margins, especially as governments tighten rules on emissions and data security.
  
• Heavy dependence on China for sales leaves Li Auto vulnerable to economic slowdowns, shifting policy, and regulatory crackdowns, with any domestic consumption downturn posing a major threat to both deliveries and overall earnings stability.
  
• The accelerating competitive landscape, led by aggressive pricing and rapid iteration from domestic giants like BYD and global players such as Tesla, may lead to increased marketing and sales expenses as well as lower average selling prices, compressing both revenue growth and gross margin.
  
• Delays or execution failures in transitioning from EREV to pure BEV models could result in rapid technological obsolescence, eroding Li Auto's competitive positioning just as consumer preferences and regulations shift more definitively toward full electrification, ultimately threatening both sales and long-term profitability.

Li Auto Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Li Auto compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Li Auto's revenue will decrease by 1.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 5.6% today to 6.7% in 3 years time.
• The bearish analysts expect earnings to reach CN¥9.3 billion (and earnings per share of CN¥9.15) by about September 2028, up from CN¥8.1 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 22.3x on those 2028 earnings, up from 21.6x today. This future PE is greater than the current PE for the US Auto industry at 18.3x.
• Analysts expect the number of shares outstanding to grow by 0.81% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.67%, as per the Simply Wall St company report.

Li Auto Future Earnings Per Share Growth

Risks

• Continued strong investment in research and development-especially in artificial intelligence-assisted driving, in-house chip design, and battery technology-could lead to product differentiation and technological leadership, potentially driving higher demand and supporting sustained growth in earnings.
  
• Expansion of the product lineup with successful launches of new models like Li i8 and Li i6, alongside consistent sales strength in existing BEV and EREV vehicles, may enable Li Auto to gain market share and grow its addressable customer base, boosting revenues over the long term.
  
• A rapidly expanding charging network, with industry-leading ultra-fast charging capabilities and user-focused enhancements, positions Li Auto to capitalize on rising EV adoption and directly support sales growth and future margin improvements as utilization increases.
  
• Strategic efforts to strengthen direct sales, optimize retail footprint-including in lower-tier cities-and invest in localized marketing and digital operations could enhance customer acquisition and conversion rates, ultimately increasing topline revenue and supporting scale efficiencies over time.
  
• The company's proactive approach to global market expansion, demonstrated by overseas R&D centers and preparations to meet global regulations, may unlock significant new revenue streams outside China and reduce reliance on domestic demand, leading to long-term earnings and margin upside.

Valuation

• The assumed bearish price target for Li Auto is $19.48, which represents two standard deviations below the consensus price target of $29.25. This valuation is based on what can be assumed as the expectations of Li Auto's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $38.94, and the most bearish reporting a price target of just $18.1.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be CN¥138.9 billion, earnings will come to CN¥9.3 billion, and it would be trading on a PE ratio of 22.3x, assuming you use a discount rate of 12.7%.
  
• Given the current share price of $24.1, the bearish analyst price target of $19.48 is 23.7% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.