Expanding BEV Line And AI Autonomy Will Increase Competitive Advantage

Key Takeaways

• Expansion in BEV product line and AI-driven autonomous driving innovations will capture market share and increase competitive advantage.
  
• Investment in retail expansion and vertically integrated supply chain aims to drive sales growth and improve profitability through cost efficiency.
  
• Intense competition in the NEV market, ambitious infrastructure expansion, and heavy R&D investments pose risks to Li Auto's market share and financial margins.

Catalysts

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

• Li Auto's strategic focus on expanding its BEV (Battery Electric Vehicle) product line and charging infrastructure is expected to boost future sales and revenue growth by capturing a larger market share in the high-end BEV segment.
  
• The company is leveraging AI-driven autonomous driving innovations to enhance product offerings, which could increase its competitive advantage and improve earnings through higher vehicle pricing and more attractive product features.
  
• Li Auto's expansion of its retail and service network, particularly in third-tier and lower-tier cities, is expected to drive sales growth and increase revenue by improving accessibility and brand presence.
  
• Strong R&D investments, especially in autonomous driving and integration of technologies, may enhance Li Auto's product mix and operating efficiencies, potentially improving net margins through cost reductions and enhanced product value.
  
• The company's ongoing shift towards a vertically integrated, efficiency-focused supply chain is anticipated to lower production costs, thus improving gross margins and overall profitability.

Li Auto Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Li Auto's revenue will grow by 23.4% 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¥18.22) by about December 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 2.3x on those 2027 earnings, down from 16.0x today. This future PE is lower than the current PE for the US Auto industry at 20.9x.
• Analysts expect the number of shares outstanding to decline by 0.57% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.85%, as per the Simply Wall St company report.

Li Auto Future Earnings Per Share Growth

Risks

• Li Auto faces intense competition in the NEV market, with many new players entering the segment. This could potentially impact market share and affect future revenues if Li Auto fails to differentiate itself effectively.
  
• The company's strategy relies heavily on rapid advancements and updates in autonomous driving technologies, which will require continuous and potentially high R&D investments, impacting net margins if anticipated benefits don't materialize.
  
• Li Auto's ambitious expansion in charging infrastructure, targeting to exceed Tesla in key cities, could stretch capital expenditures and affect free cash flow if utilization rates do not increase as expected due to a lower BEV population.
  
• Uncertainties related to international expansion, especially with a current focus on regions like the Middle East and Central Asia, may pose risks if efforts do not translate into meaningful revenue growth, delaying a return on investment.
  
• The reliance on extensive training data and model improvement for autonomous driving could widen performance gaps with competitors, but it also poses risks of escalating operational costs that could put pressure on operating income.

Valuation

• The analysts have a consensus price target of CN¥30.31 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¥39.06, and the most bearish reporting a price target of just CN¥21.61.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be CN¥266.4 billion, earnings will come to CN¥17.9 billion, and it would be trading on a PE ratio of 2.3x, assuming you use a discount rate of 11.9%.
• Given the current share price of CN¥22.4, the analyst's price target of CN¥30.31 is 26.1% 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.