Critical Expansions And Electric Innovations Energize Growth Amidst Market Challenges

Key Takeaways

• Strategic expansion in sales and services, particularly in smaller cities, aims to drive revenue growth and increase brand awareness.
  
• Advancements in autonomous driving and BEV strategies could enhance market share, average selling price, and improve net margins.
  
• Li Auto's ambitious expansion and innovation strategies face challenges from capital expenditure, competition, and market risks, potentially impacting revenue and profitability.

Catalysts

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

• Li Auto's strategic expansion in the sales and servicing network, particularly in third-tier and lower-tier cities, is expected to drive future revenue growth as the company aims to capture new market segments with increased brand awareness and market penetration.
  
• The company's BEV (Battery Electric Vehicle) strategy, including the launch of BEV electric SUVs and the establishment of a comprehensive charging network, is anticipated to positively impact future revenue and market share by appealing to environmentally conscious customers and enhancing the charging experience.
  
• Continued advancements in autonomous driving technology, including frequent updates and improvements in autonomous driving capabilities, are likely to enhance the product mix and increase the average selling price, which should support improvements in net margins.
  
• Li Auto's focus on R&D to maintain and enhance its competitive edge in AI-powered autonomous driving and smart assistant technology could drive long-term revenue growth by attracting tech-savvy customers and enhancing the overall value proposition of their vehicles.
  
• Economies of scale from increased vehicle deliveries and production efficiency, along with strategic partnerships to optimize the supply chain, could lead to further reductions in cost of sales, thereby improving gross margins and overall earnings in the future.

Li Auto Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Li Auto's revenue will grow by 23.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 7.2% today to 6.7% in 3 years time.
• Analysts expect earnings to reach CN¥17.9 billion (and earnings per share of CN¥17.06) by about November 2027, up from CN¥10.2 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CN¥31.4 billion in earnings, and the most bearish expecting CN¥10.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 2.5x on those 2027 earnings, down from 15.8x today. This future PE is lower than the current PE for the US Auto industry at 15.8x.
• Analysts expect the number of shares outstanding to grow by 1.66% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.4%, as per the Simply Wall St company report.

Li Auto Future Earnings Per Share Growth

Risks

• Despite impressive sales growth, Li Auto faces intense competition in the NEV market, which could pressure pricing and market share, potentially impacting overall revenue growth.
  
• The company plans aggressive expansions in their charging network ahead of launching new BEV models, which may result in significant capital expenditure, impacting free cash flow and net margins.
  
• Heavy reliance on technology innovation, including AI-driven autonomous driving, involves substantial ongoing R&D investments, which can strain operating expenses and affect net earnings if returns are delayed.
  
• Significant revenue growth expectations rely on successful market penetration of new BEV models, but delays or underperformance in this segment could adversely affect revenue and net profit margins.
  
• International expansion presents strategic opportunities but also exposes the company to foreign market risks, regulatory challenges, and potential unanticipated costs affecting operating cash flow and earnings.

Valuation

• The analysts have a consensus price target of CN¥30.35 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 CN¥39.25, and the most bearish reporting a price target of just CN¥21.72.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be CN¥266.3 billion, earnings will come to CN¥17.9 billion, and it would be trading on a PE ratio of 2.5x, assuming you use a discount rate of 11.4%.
  
• Given the current share price of CN¥22.35, the analyst's price target of CN¥30.35 is 26.4% 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.