New BEVs And Autonomous Driving To Expand NEV Market Presence

Key Takeaways

• Investment in autonomous driving, AI, and R&D aims to enhance innovation and product offerings, potentially boosting revenue through improved customer experience and market differentiation.
  
• Expansion in BEVs, supercharging, and sales networks seeks to capture market share and improve operational efficiency, potentially driving revenue and market presence.
  
• Intensifying competition and AI investments strain Li Auto's margins and cash flow, challenging market share and future earnings amidst declining average selling prices.

Catalysts

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

• Li Auto's investment in autonomous driving technology, specifically their dual-system approach combining end-to-end models with vision language models and the rollout of their AD Max V13, positions the company for continued innovation and improved product offerings, potentially increasing future revenue through enhanced customer experience and advanced driving features.
  
• The company's planned launch of two battery electric SUVs (BEVs) in 2025, alongside their current range-extended vehicles, could capture a larger market share and boost vehicle sales, driving up revenue growth as they tap into a broader segment of the NEV (New Energy Vehicle) market.
  
• Li Auto's expansion of their supercharging network, with a target to establish 4,000 stations by the end of 2025, aims to reduce range anxiety and enhance the ownership experience, possibly growing their customer base and supporting higher sales volumes, which can positively affect revenue.
  
• The strategic shift in their sales network, moving from mall-based locations to major auto parks for higher efficiency, and the expansion of their international R&D and service centers in key regions are expected to bolster market presence and operational efficiency, likely improving earnings through effective sales strategies and market expansion.
  
• Increased investments in AI and R&D, including their overseas expansion plans with a new R&D center in Munich and service centers in various regions, are designed to strengthen Li Auto's technological leadership and support product development, potentially leading to higher margins due to the competitive advantages and technological differentiation in new markets.

Li Auto Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Li Auto's revenue will grow by 21.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.6% today to 7.5% in 3 years time.
• Analysts expect earnings to reach CN¥19.3 billion (and earnings per share of CN¥20.54) by about April 2028, up from CN¥8.0 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CN¥31.5 billion in earnings, and the most bearish expecting CN¥13.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.2x on those 2028 earnings, down from 23.4x today. This future PE is lower than the current PE for the US Auto industry at 20.2x.
• Analysts expect the number of shares outstanding to grow by 0.7% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.8%, as per the Simply Wall St company report.

Li Auto Future Earnings Per Share Growth

Risks

• The company's revenues could be impacted by a decline in average selling prices due to changing product mixes and consumer interest subsidies, which may exert downward pressure on vehicle pricing.
  
• Gross margins have decreased year-over-year and quarter-over-quarter, primarily due to losses on purchase commitments and lower average selling prices, which could impact net profit margins if not addressed.
  
• A significant increase in AI-related investments could strain cash flows and resources, potentially impacting net margins if the AI initiatives do not generate sufficient return on investment.
  
• The competitive landscape in the NEV market is intensifying, with a focus on advanced autonomous driving systems, which could challenge Li Auto's ability to maintain or grow market share, thus impacting future earnings and revenue growth.
  
• Estimated first-quarter 2025 revenue is expected to decrease year-over-year, which could signal challenges in sustaining sales momentum amidst competitive and market pressures, directly affecting earnings.

Valuation

• The analysts have a consensus price target of $32.725 for Li Auto based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $39.82, and the most bearish reporting a price target of just $19.53.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CN¥258.4 billion, earnings will come to CN¥19.3 billion, and it would be trading on a PE ratio of 18.2x, assuming you use a discount rate of 12.8%.
• Given the current share price of $25.64, the analyst price target of $32.72 is 21.6% higher.
• 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.