New BEV And AI Investments Will Unlock Future Opportunities

Key Takeaways

• Li Auto's strategic expansion, including new models and supercharging networks, is expected to drive revenue growth and improve margins through enhanced customer retention.
  
• Investment in AI, international expansion, and sales strategy shifts position Li Auto as a leader in smart vehicle technology and boost global market share.
  
• Declining vehicle margins and profitability, coupled with pricing pressure and planned AI investments, may challenge Li Auto's financial stability and investor confidence.

Catalysts

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

• Li Auto's continuous expansion and improvement of its product portfolio, including plans to launch new BEV models like the Li i8 and Li i6, are expected to drive significant revenue growth by tapping into new market segments.
  
• The accelerated deployment of the supercharging network, with plans to have 4,000 stations by the end of 2025, will likely enhance customer experience and contribute to increased vehicle sales, supporting revenue growth and potentially improving net margins through higher customer retention.
  
• Investment in AI and autonomous driving systems, such as the rollout of the AD Max V13 and the upcoming Vision-Language-Action architecture, positions Li Auto as a leader in smart vehicle technology, potentially boosting future sales and enhancing earning potential.
  
• Expansion into international markets, including strategic partnerships and the establishment of an R&D center in Munich, is poised to diversify revenue streams and increase Li Auto's global market share, leading to higher earnings.
  
• The strategic transition of sales centers from shopping malls to major auto parks and the addition of retail stalls and pop-up stores are likely to enhance sales efficiency, boost same-store sales, and thereby improve operational margins.

Li Auto Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Li Auto compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Li Auto's revenue will grow by 33.9% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 5.6% today to 9.1% in 3 years time.
• The bullish analysts expect earnings to reach CN¥31.5 billion (and earnings per share of CN¥25.55) by about April 2028, up from CN¥8.0 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 bullish analyst cohort, the company would need to trade at a PE ratio of 13.1x on those 2028 earnings, down from 21.6x today. This future PE is lower than the current PE for the US Auto industry at 18.0x.
• Analysts expect the number of shares outstanding to grow by 1.06% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.03%, as per the Simply Wall St company report.

Li Auto Future Earnings Per Share Growth

Risks

• The press release highlights that Li Auto's net income for the fourth quarter was 38.6% lower compared to the same period last year, which could indicate declining profitability and affect earnings.
  
• Li Auto's vehicle margin declined from 22.7% to 19.7% year-over-year, partly due to losses on purchase commitments and lower average selling prices, potentially impacting the company's future gross margins.
  
• The company issued interest subsidies to customers which contributed to the lower average selling price, indicating potential pressures on pricing strategy that could affect revenue.
  
• Despite expanding their supercharging and retail network, the report indicates the company's total revenue for Q1 2025 is expected to decrease by as much as 8.7% year-over-year, which might impact investor confidence.
  
• The text indicates significant planned future investments particularly in artificial intelligence, which while crucial may put pressure on current cash flow and profitability.

Valuation

• The assumed bullish price target for Li Auto is $37.48, which represents one standard deviation above the consensus price target of $32.76. 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 bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $39.75, and the most bearish reporting a price target of just $19.5.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be CN¥346.8 billion, earnings will come to CN¥31.5 billion, and it would be trading on a PE ratio of 13.1x, assuming you use a discount rate of 13.0%.
• Given the current share price of $23.44, the bullish analyst price target of $37.48 is 37.5% 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.