Trade Barriers Will Burden Margins While New Networks Will Emerge

Key Takeaways

• Limited export growth and heightened supply chain risks threaten Li Auto's global expansion and revenue potential amid ongoing geopolitical and trade barriers.
  
• Shifting consumer preferences, reduced government incentives, and intensifying competition risk undermining margins, sales growth, and long-term profitability.
  
• Vertical integration, infrastructure expansion, and successful multi-segment electrification are fueling Li Auto's market leadership and positioning it for sustained high-margin growth in new and existing regions.

Catalysts

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

• Export growth for Li Auto is likely to remain limited over the long run due to persistent geopolitical tensions, trade restrictions and regulatory barriers between China and Western markets, which could restrict international expansion and cap potential revenue streams well below management's 30 percent overseas sales target.
  
• The risk of changes in government policy-with China likely to reduce or phase out electric vehicle purchase subsidies and incentives as the new energy vehicle market matures-poses a threat to sustained domestic demand, directly undermining Li Auto's expected unit sales growth and revenue trajectory.
  
• A heavier reliance on extended-range EV technology while consumer preferences shift aggressively towards pure battery electric vehicles may render Li Auto's core product lineup less competitive, requiring expensive pivots in R&D and manufacturing that could compress net margins and delay profitability.
  
• Accelerating competition from both established domestic automakers and international entrants in the premium BEV segment is creating substantial downward pricing pressure, which is poised to erode vehicle margins and could lead to persistently lower earnings despite higher volume.
  
• Supply chain vulnerabilities, especially in the sourcing of critical batteries, semiconductors, and other components due to rising global protectionism and localized supply chains, heighten the risk of production delays and cost increases, jeopardizing Li Auto's ability to deliver on revenue and margin expectations in the medium to long term.

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 grow by 11.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 5.6% today to 5.2% in 3 years time.
• The bearish analysts expect earnings to reach CN¥10.6 billion (and earnings per share of CN¥10.12) by about August 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 22.9x on those 2028 earnings, up from 22.1x today. This future PE is greater than the current PE for the US Auto industry at 18.5x.
• Analysts expect the number of shares outstanding to grow by 0.62% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.7%, as per the Simply Wall St company report.

Li Auto Future Earnings Per Share Growth

Risks

• Robust long-term growth in premium NEV demand in China, combined with Li Auto's ability to deliver more than 92,000 vehicles in Q1 2025 and maintain market leadership with a 14 percent share for 14 consecutive months, indicates expanding revenue potential as electrification accelerates.
  
• Successful expansion beyond EREV into BEVs, with strong early order inflows (over 90 percent of new Li MEGA orders for the high-end Home variant) and imminent launches of additional BEV models (i8 and i6), positions the company to participate in multiple high-growth segments, supporting sustained top-line momentum.
  
• Construction of China's largest urban highway supercharging network by any automaker, with more than 2,350 stations and a plan to reach 4,000 by year-end, addresses infrastructure barriers and differentiates the brand, which could boost BEV sales and enhance future revenues.
  
• Ongoing innovation in proprietary vehicle operating systems (Halo OS) and in-house ADAS (VLA Driver), with commercial rollouts through both new models and over-the-air updates, enables vertical integration and unique software-driven value propositions, paving the way for higher-margin service revenue streams.
  
• Strategic network expansion into Tier 4 and Tier 5 cities through the Star program, with pilot results showing Li Auto quickly capturing more than 25 percent market share in new regions, broadens the addressable market and supports stronger revenue growth and margin opportunities in less saturated areas.

Valuation

• The assumed bearish price target for Li Auto is $22.87, which represents two standard deviations below the consensus price target of $32.84. 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 $40.24, and the most bearish reporting a price target of just $18.08.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be CN¥202.7 billion, earnings will come to CN¥10.6 billion, and it would be trading on a PE ratio of 22.9x, assuming you use a discount rate of 12.7%.
  
• Given the current share price of $24.65, the bearish analyst price target of $22.87 is 7.8% 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.