sefa ozel
Li Auto (NASDAQ:LI) reported much better than expected results for the fourth quarter and the company’s outlook for Q1’24 has been quite impressive as well, causing shares to roar higher. Li Auto, which has pulled ahead of the competition in the start-up electric vehicle market, including NIO (NIO) and XPeng (XPEV), is guiding for between 100,000 and 103,000 electric vehicle deliveries in Q1’24. Earlier this month, the company’s CEO said the firm is targeting a massive full-year delivery volume of 800,000 electric vehicles. Considering that Li Auto’s vehicle margins also expanded Q/Q, I believe Li Auto is a very solid bet on the Chinese EV market and shares seem primed to outperform in FY 2024.
Previous rating
I worked on Li Auto after the company reported third-quarter results – Li Auto: Decoupling From The EV Competition – which showed healthy double-digit vehicle margins as well as unparalleled top-line momentum. The company also decoupled from other EV makers in terms of delivery growth. Based off of Li Auto’s delivery projections, Li Auto could be set to deliver more EVs in FY 2024 than it did in its entire history.
Li Auto achieves record deliveries and revenues in 2023, 800k deliveries possible in 2024
Li Auto ended FY 2023 with total deliveries of 376,030 electric vehicles (+182% Y/Y). For comparison, NIO delivered 160,038 electric vehicles in 2023, showing a Y/Y growth rate of 31%, and XPeng made 141,601 customer deliveries last year (+17%). In other words, in FY 2023 Li Auto grew about 6X faster than NIO and 11X faster than XPeng.
InsideEVs
This momentum in deliveries, driven by the company’s flagship SUV products, has led to record revenues in the fourth-quarter as well. Li Auto’s EV operations generated 41.7B Chinese Yuan ($5.9B) in the fourth-quarter of 2023, showing a top-line growth rate of 136.4%. Full-year revenues reached 123.9B Chinese Yuan ($17.4B) in 2023, showing an increase of 173.5% year over year.
While results beat consensus expectations on both the top and the bottom line, the real takeaway for Li Auto was that the company continued to make progress in terms of expanding its vehicle margins. In Q4’23, Li Auto had a vehicle margin of 22.7% compared to 21.2% in the previous quarter, thereby showing a 1.5 PP margin expansion Q/Q. Margins have been a sore spot for some EV companies, especially for XPeng which reported a negative vehicle margin of 6.1% in Q3’23 (fourth-quarter results have not been released yet). NIO had a Q3’23 vehicle margin of 11.0% and has seen an improving margin trend recently, which I discussed in: Why 2024 Could Be The Year Of NIO.
Li Auto therefore does not only have much stronger delivery momentum, driven by the popularity of its SUV line-up, but significantly higher margin, which I believe significantly enhances the company’s value proposition for long-term investors.
Li Auto
The delivery record of FY 2023 has an important implication for Li Auto’s delivery potential in FY 2024. Li Auto guided for 100,000 and 103,000 electric vehicle deliveries for Q1’24 which at the mid-point represents a Y/Y growth rate of 93%. Earlier in February, Li Auto’s founder and CEO Li Xiang said that the company will seek to reach a delivery volume of 800,000 electric vehicles in FY 2024 (+113% Y/Y), so the company’s delivery trajectory is set to ramp up nicely this year. The delivery forecast for Q1’24 especially as well as the overall well-received Q4 earnings release was the reason why Li Auto’s shares soared after the earnings report.
Li Auto is set for new product launches
Li Auto confirmed at the end of December that it plans to start making deliveries of its newest electric vehicle product, the Li Mega multipurpose vehicle, in March 2024. When the company unveiled the Li Mega EV at the Guangzhou Auto Show last year, Li Auto said the EV would cost consumers less than 600,000 Chinese Yuan ($84,500) and that it already received 10,000 reservations within the first two hours in which reservations were open. Given this success, I believe the Li Mega could further accelerate Li Auto’s revenue momentum.
Additionally, the launch of the Li Mega will also change the EV company’s electric vehicle line-up as it will complement its SUV-centric portfolio which so far only consists of the Li L7, Li L8 and Li L9, all of which are sport utility vehicles (of different size). Therefore, the launch of the Li Mega is set to open up a new front in the electric vehicle market for Li Auto.
Li Auto: now profitable, set to add $21.1B in revenues in the next two years
I said in my previous work that Li Auto was expected to be profitable in FY 2023, which it was. This makes Li Auto stand out even more from its EV start-up competition, since most EV makers are still bleeding money.
Li Auto reported net income of 11.8B Chinese Yuan ($1.7B) for FY 2023, which makes it one of the first EV start-ups to reach profitability – BYD (OTCPK:BYDDF) is also profitable, but has a much higher delivery volume than Li Auto. BYD also recently overtook Tesla (TSLA) in terms of production volume.
With a new product set to roll off of Li Auto’s factory belts in Q1’24 and with massive delivery momentum spilling over into FY 2024, I believe Li Auto could also be set for a number of potentially significant revenue estimate revisions as the year progresses. Revenue estimates have already surged after the company reported Q4’23 earnings.
Li Auto is now expected to add a solid $11.6B to its revenue volume this year and another $9.5B in FY 2025. The Chinese EV maker is currently trading at a P/S ratio of 1.2X while the 1-year average P/S ratio is 1.1X. Investor optimism has resulted in a strong upside revaluation for Li Auto last week, but I continue to focus on the long term and the company’s significant delivery and revenue upside as it complements its SUV-centric EV portfolio. If the company continues to execute well in terms of delivery growth and expands its vehicle margins, then I believe Li Auto could return to at least a 2.0X valuation multiplier… which is also the firm’s 3-year average price-to-revenue ratio.
A fair value P/S of 2.0X implies revaluation potential up to $75. This is my long-term fair value target for Li Auto that I do not expect to be realized in the short term, however. My fair value estimate is dependent on the speed of Li Auto’s delivery ramp, the firm’s ability to grow vehicle margins and expand its profitability.
Risks with Li Auto
Li Auto’s momentum with regard to revenues and deliveries may slow if China’s economy were to experience a broader downturn, in which case Li Auto may be forced to lower prices. Lower prices most certainly would translate to margin pressure and with Li Auto currently reporting the highest vehicle margins in the start-up segment in China (~23%), I believe such a development may hurt Li Auto more than other EV companies.
Closing thoughts
Li Auto’s earnings report for Q4’23 was more than impressive, and it already has led to drastic upward revisions in revenue estimates for this year and next year. Right now, Li Auto is expected to add $21.1B in new revenues to its consolidated top line in the next two years, in part helped by new product launches such as the Li Mega which is coming out in March 2024. Additionally, Li Auto managed to achieve a record delivery volume in FY 2023 and the guidance for Q1’24 was impressive. The “unofficial” guidance for FY 2024 — 800k deliveries — was a blowout. If the margin trend also holds up, I believe Li Auto could be a top-performing EV start-up company in FY 2024!
